Pradeep Gaur/Mint
Pradeep Gaur/Mint

Under-construction houses to get costlier

Once the higher service tax is implemented, the overall cost of such houses will go up

Buying a house is a costly affair and the proposed increase in service tax only makes matters worse. In budget 2015-16, it was proposed that a homebuyer will pay a service tax of 14% while buying a property that’s under construction instead of the current 12.36%. Let’s take a look at how this will affect the overall cost of buying a house.

Service tax is applicable on almost all services that a consumer avails, including buying an under-construction property. This is so because, in case of an under-construction property, the developer is deemed to be the provider of construction services to the homebuyer, and hence service tax is charged on the cost of construction. It is not charged on the entire value of the property but only to the extent of cost of construction. This means that cost of land is excluded.

For the purpose of calculation, 25% of the gross value of an under-construction unit with value less than 1 crore is considered to be the cost of construction, and service tax is applied on this.

The effect of service tax is felt more on high-value properties. “Properties valuing more than 1 crore attract service tax of 30% of the gross value," said Pratik Jain, partner–indirect tax, KPMG India.

As service tax is charged only on the construction cost, the effective rate on the entire value of a property below 1 crore is 3.09% (12.36% on 25% of property value) and for a property above 1 crore, the effective rate on the entire value of the property is 3.71% (12.36% on 30% of property value). These rates are as of now, and are likely to change once the Finance Bill, 2015 is passed.

As proposed in the budget, with effect from 1 April 2015, the effective rate of service tax on entire value of property will increase. It will become 3.50% (14% on 25% of property value) and 4.2% (14% on 30% of property value) for properties valued below and above 1 crore, respectively. Say, you plan to buy an apartment worth 1.25 crore. If you buy this in March itself, you will have to pay a service tax of 4.64 lakh at the rate of 12.36% on 30% of gross value, or 3.71% of total gross value. From April onwards, it is likely that you will have to pay 5.25 lakh as service tax on the same property as the service tax rate then will be 14% on 30% of gross value, or 4.20% of gross value. In effect, this means you will have to pay 61,000 more towards service tax.

Besides the basic cost of the unit, a homebuyer also has to pay additional charges for facilities such as preferential location, car parking, club membership, rain water harvesting and others. “All these are subject to service tax, which will be applicable on the entire value of such charges," said Krupa Venkatesh, senior director, Deloitte Haskins & Sells LLP. The rate of service tax on these charges will also go up from 12.36% to 14%.

Increase in service tax will also have an effect on some accompanying costs, such as services of a property agent, valuer, lawyers and so on. Besides these, if you are taking a home loan, you have to pay service tax on the processing fee and other charges. Buying house insurance, too, will cost you more.

“Increase in service tax will result in 0.7-0.9% net increase in cost of a property for a home buyer," said Nishant Singhal, director–strategy and alliances, Investor Clinic Infratech Pvt. Ltd.

There are, however, a few charges that a developer levies on a homebuyer but which are exempt from service tax. “A homebuyer need not pay service tax on charges related to external and internal development as these charges are collected by the project’s developer and paid to the government authority for the related services provided by them," said Singhal. Building of public services such as roads, sewage, water supply and others come in this category.

Some smaller houses, too, are exempt from service tax. “Affordable housing or low-cost housing where carpet area is less than 60 sq. mt. per house (646 sq. ft) in approved housing projects is exempt from service tax implication," said Jain.

Another factor that could increase the cost of buying a house is the Swachh Bharat cess (SBC). During the budget speech, finance minister Arun Jaitley had proposed levying the cess at a rate of 2% or less on all or certain services if the need arose. “SBC, if implemented, will be over and above the service tax," said Venkatesh.

Typically, an offer price for an apartment advertised by a developer only showcases the basic selling price. Most of the associated costs such as car parking, club membership fee, interest-free maintenance deposit, preferential location charges and so on are excluded, and you have to pay service tax and value-added tax (the latter varies across states) on these. Then there are stamp duty and registration fee to be paid as well. All these charges generally constitute 25-30% of the basic selling price. So, if you plan to buy a property, make sure that you have made provision for this additional cost as well.

Also, calculate how the increase in service tax will affect your budget.

You could look for a property in a completed project where the developer has already acquired the completion certificate from the authority because this signifies that the project is complete and ready to be occupied. So, if you buy a ready-to-move-in property, you don’t have to pay service tax. The benefit, however, may be nullified by the fact that such properties come at a premium compared with under-construction properties. But again, there are other advantages, such as no risk of delay, instant occupation (so you save on rent), leasing it out (source of income), claiming the substantial home loan tax benefits from the same financial year onwards, and others.

What this means is that you should avoid doing rough calculations, and instead find out all the detailed costs related to buying a house. Then segregate these into “service tax applied" and “service tax not applied". This exercise will help you tally the real cost of the increase in service tax, which may help you choose between an under-construction property and one that’s already built.