For long there was a debate around when a developer should charge service tax to a home buyer while selling the property—when the property is being constructed, or even after it is finished and occupancy certificates received. Resolving the issue, the Ministry of Finance issued a circular on 26 October, stating that developers should not levy service tax on sale of flats and apartments once occupancy certificate is received but completion certificate is not. In its statement, the ministry stated, “...that sale of flats/dwellings, etc., where the entire consideration is received after issue of occupancy certificate by Brihanmumbai Municipal Corporation (BMC), leading to a mere transfer of title in immovable property, falls outside the definition of “Service" provided in Section 65B (44) of the Finance Act, 1994, and is therefore, not taxable." In many projects, the developer may get the occupation certificate phase-wise, and the completion certificate once the whole project is completed.
Such disputes were more common in the jurisdiction of Municipal Corporation of Greater Mumbai, i.e., BMC. Therefore, the ministry specially conveyed this clarification to the tax authorities in Mumbai on 23 October 2015.
WHEN DO YOU NEED TO PAY?
If you are buying an under-construction property from a developer, in such a case, the developer is deemed or considered to be the provider of construction services to the home buyer. So, service tax is charged to the home buyer on the cost of construction. It is not charged on the entire value of the property, but only on the cost of construction; land cost is excluded.
Within a residential project or a building, it is difficult to segregate the construction cost of a single unit. Therefore, for the purpose of calculation, 25% of the gross value of an under-construction unit is considered as the cost of construction and service tax is charged on that amount. If the gross property value is higher than 1 crore, service tax will be charged on 30% of the gross value. As service tax is charged only on the construction cost, the effective rate of service tax on the entire value of a property below 1 crore is 3.50% (14% on 25% of property value) and 4.2% (14% on 30% of property value) for the a property valued above 1 crore.
OTHER COSTS THAT ATTRACT SERVICE TAX
Apart from the basic cost of the unit, a home buyer also has to pay additional charges such as for preferential location, club membership, rain water harvesting and others. All such charges are subject to service tax. If a home buyer takes services of a property agent, valuer, and/or lawyer, their fees, too, attracts service tax. If taking a home loan, service tax is charged on the home loan processing fee. Home insurance premium, too, has it.
WHAT IS EXEMPT FROM SERVICE TAX?
A home buyer need not pay service tax on charges related to external and internal development (EDC and IDC) as these are collected by the developer and paid to the government authority for the related service provided by them. Affordable housing or low-cost housing where the carpet area is less than 60 sq. mt. (about 640 sq. ft) per house in approved housing projects is exempt from service tax.