Published On: Thu, Jun 10th, 2010

Recent Development in Service Tax and VAT in Real Estate

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By Kantilal Jain, FCA

In the budget for 2010 both Central and State Governments have made certain amendments to levy tax on sale of immovable property under construction to enhance their revenue and to overcome certain judicial pronouncements. An attempt is made to discuss the implications of the above amendments on the real estate transactions as to how the general public will be affected by way of additional cost on account of the above mentioned amendments.

SERVICE TAX

By the Finance Act, 2010 the Government has amended the definition of Commercial or Industrial Construction Service [Section 65 (25b) read with Section 65 (105) (zzq)] and construction of Residential Complex [Section 65 (30a) read with Section 65 (zzzh)].

The scope of these categories is expanded to cover sale of flats/units under construction. Builders/developers are now liable to service tax if any payment towards sale consideration is received before the grant of completion certificate by the competent authorities for such flats/units. This amendment overrides the Gauhati High Court’s decision in the case of Magus Construction Private Limited v/s UOI [2008 11 STR 225].

Therefore, if a builder/developer receives the entire sale consideration for flats/units after issue of completion certificate, the same is not liable to service tax.

There is an abetement of 75% of the sale value. Thus, the tax will be levied on 25% of the sale value of flat at the rate of 10.3%. For example if the agreement value of a flat sold under construction is Rs. 50,00,000/- then service tax @ 10.3% is payable on Rs. 12,50,000/- which works out to 1,28,750/-. Thus, there will be an additional burden of 2.6% on the agreement value of flat. The amendment will be effective from the date to be notified by the Central Government.

….Contd. 2.

: 2 :

VAT

The Maharashtra Government in the state budget has also introduced a new composition scheme on sale of under construction property along with land or interest in land @ 1% of the agreement value. The scheme is effective from 1st April, 2010 but the notification in respect of the same about the manner in which the tax is to collected by the builder/developer has not yet come. There is no set off for inputs.

It may be noted that already a composition scheme @ 5% is in operation which is effective from 20th June, 2006 i.e. the date on which the transfer of property under construction was brought within the ambit of VAT.

It may further be noted that the levy of tax on property under construction itself is challenged by Maharashtra Chamber of Housing Industry (MCHI) an association of builders by a writ petition in Bombay High Court (being Tax writ petition No. 2022 of 2007). The major issue involved in the writ petition is the competency of the State Legislature to enact the definition of Works Contract in the manner which suggests its applicability to the builders/ developers, in addition to the contractors. The definition talks about transfer of property in goods in the execution of works contract including the building, construction, ……. . The Government is competent to levy tax on construction (sale of goods involved in construction). Article 366 read with Article 246 (2) of the Constitution has authorised it to do so. But power to levy tax on building; i.e. Sale of flats is unimaginable. It appears that prima facie the Hon’ble High Court is convinced about this position and ordered for an interim relief for the members of the Association. The Hon’ble High Court has directed that the members of the MCHI should not be treated as ‘dealers’ liable to tax under the MVAT Act, 2002 in respect of sale of flats on ownership basis under the Maharashtra Ownership Flats Act, 1963 (MOFA Act), provided such members of MCHI submit the data and documents as mentioned in the Court Order. Thus, such members of MCHI have been absolved from registration and also from assessments till the disposal of the petition. However, the developers who are not members of the Association are not protected by the Court Order.

….Contd. 3.

: 3 :

It seems that to divert the attention of the public from the court matter, the Government has introduced new composition scheme @ 1% on the agreement value of the transfer of flat/unit under construction without providing any deduction for land etc.

There is an impression in the mind of people that this is a new amendment and only under construction flats/units sold after 1st April, 2010 are chargeable to VAT @ 1%. This is not so, the amendment regarding tax on flat/unit under construction is effective from 20th June, 2006. In this budget the Government has come out with new composition scheme of 1% of agreement value without any deduction for land against earlier composition scheme of 5%.

Though the new composition scheme is effective for the flat/units registered on or after 1st April, 2010 the notification in respect of the same regarding procedural aspect has not yet come. In the absence of the notification the builders are in a dilemma as to how and in what manner the tax is to be collected as the full sale price is not collected at the time of executing agreement for flat/unit which is under construction.

Thus in the hands of purchaser the overall cost of the flat/unit is going to increase by about 3.6% of the agreement value by way of Service Tax and VAT. In the given example of Rs. 50,00,000/- value of flat, the additional cost by way of Service Tax will be Rs. 1,28,750/- and by way of VAT will be Rs. 50,000/- making it a total of Rs. 1,78,750/-.

It is pertinent to note that the above cost can be avoided if a ready flat is purchased after builder obtains completion certificate.

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  1. Shyam Gunavanthe says:

    Hi! I have made entire payment in respect of my new flat before 31-03-2010 and got it registered before that date. I have also been handed over possession for carrying out interior work in April this year although Occupation Certificate has still not been obtained by builders. Am I liable to pay VAT?

  2. debendra tripathy says:

    Dear Sir,

    I have purchase a flat of 18,00,000/- @ Kalyan. The regd has done on Dec 2010. Now he is giving me the flat as it is completed. He too is asking me to pay the Service Tax and Vat to pay as per the law. Whether I am liable to pay the amout. or it is to be paid by the Builder, and I am being passed the responsibility? VAT can’t be calculated on non moving item how does it is applicable? plz reply. I am in a short notice.Thnx.

  3. farukh says:

    what will be the additional value of  the flat of having agreement value Rs.1300000/-?????????

  4. S. J. Gorule says:

    I have purchased a flat at Dombivli and registered on 13th sept 2011 for 2120000. I have paid all the consideration amount but now at the time of taking possession the developer is asking for VAT+service tax that is 4.1% . Is this the correct rate he is asking for?? Is it mandatory to pay? Please let me know early..

  5. CHACKO PAUL says:

    I have purchased a property in 2003 where in registered alongwith stamp duty in 2004 the value of the property is 2400000/- part payment was given prior to registration. and balance payment in march 2012 still the builder is not given possession. he has asked us to pay vat and service tax i would like to know how much additional value would i be liable to pay.

  6. CHACKO PAUL says:

    let me know through my email

  7. Sandeep says:

    Dear Sir, i have purchased new flat at dombivali on ready possession in OCT 2011, but now builder is asking me to pay service tax & vat on the said flat. pls. guide me, is service tax & vat, applicable to me in the case of Ready Possession flat.

  8. Rakesh says:

    What is service tax on 1900000 how much ?

  9. Prashant Jadhav says:

    I have ppurchased fflat of rs.31,00,000 and rregistration iis ddone oon jjune 2010.so kkindly llet mme kknow wwhat wwill be VVAT & sservice ttax aamount

  10. arun b Goilkar says:

    Dear Sir let me konw details by mai.. details.

  11. ARVIND GHATOL says:

    Hello ! will you please guide me about VAT TAX to be paid by me on purchase of Flat whose agreement was made on 10-03-2010 . Cost of flat was Rs. 3744700. Builder has not taken any amount against VAT from me till todate but now served a notice for payment of Rs. 187235/= for the same and with in a very short time of 7 days for such a huge amount which is practically not possible at all.                                                                                                                                                                           So please guide about the exact amount of VAT TAX in this case. The builder has collected VAT @ 1%  from the other costumers who purchased the flat after  31-03-2010

  12. NIKHIL says:

    I PURCHASE FLAT IN MARCH 2010 ,

    NOW I RECIVED LETTER FROM BUILDER TO PAY VAT + SERVISE TAX AROUND 5 % ON AGGREMENT VALUE . PLS SUGGEST , WETHER THIS IS MY LIABILITY OR BUILDER’S ?

  13. Nikhil says:

    i purchase ready pessesion flat in pune from builder on 22march 2010,
    now builder demant for service tax and vat on it .
    pls suggest

  14. sahadev dhake says:

    dear sir,
    i have purchase flat on dated 24 march 2008 of agrrement cost 1965000& possesion in april 2009 then how much service tax will be applicable & can service tax also be applicable

  15. pankaj says:

    Dear Sir,
    I had puchase flat in 13 march 2010 buider had given possession in 1st july 2012. today he had send the notice for 5% VAT on 2688000/- this is flat value with intrest. Please guide what should I do as from date of registration 13 march 2010 to till date its first communication for VAT.Pankaj Eknath Shirsath-Kalyan 09833316185

  16. smita says:

    i have purchased flat in 2006. Flat agreement is of 7.4.2006, however final instalment of payment is done in july-09 . am i liable to pay service tax on flat. and if yes pl inform me calculation.

  17. Kiran Patil says:

    The property was a ready possession property since Jan 2011 i have executed agreement in Sept 2011, Builder got an OC copy in Feb 2012, my loan processing has been done in June 2012. He is claiming for VAT and ST. KIndly confirm is it applicable as after OC there is no VAT or ST applicable to be paid

  18. abhay naik says:

    please let me know VAT and service tax applicable for resale flat? This building has been built in year 2008 and builder has not obtained completion certificae till date..

  19. gaurav gite says:

    i had booked UNDER CONSRUCTION flat in bhiwandi thane. registration of flat has been done on 22/11/2011. costing RS.8863000/-.  has been paid. Now flat is ready for possession . BUILDER IS ASKING FOR I% VAT & 3.3%SERVICE TAX .
    PLEASE CLARIFY MY DOUBTS & TELL ME HOW MUCH AMOUNT I HAVE TO PAY NOW.  

  20. Anup Shirsat says:

    hi. i have taken a 3bhk flat in NASHIK gangapur road. its been six month now. we took the posssession in june 2012. all payments were done to the builder by may 2012. Only i have to give final installment of 90,000 rs.SBI released D.D. but S.B.I want sale did copy,Builder was not aggreed to did sale did . suddenly the builder has issued a letter saying that we need to pay the service tax and vat on our flat. which he had not mentioned earlier. Then he did sale did.
    Bank also dont give D.D. of last installment without sale did.

    i want to know that is it that i need to pay or is it that the builder will pay to the government. is the builder extracting extra cash from me?

  21. Ashok Shetty says:

    I have bought the flat on resale, not directly from the builder, do I still hve to pay vat.Though the flat was bought in Oct 2010, at the time though all flats were occupied till upto 6th floor, the seventh was undr constrn,the OC was given to us this year after completion of the seventh floor.

  22. malhar dubule says:

    i have purchased a flat in dec 2008 ,of aggrement value of rs 1150000 how much will be the vat amount  to pay,but nothing is mentioned in the agreement related to this.Then who will be pay this amount builder or me.
    What are the factors considered during the vat calculations(e.g. land  cost,builders profit,labour bills,purchase of material by builder with vat like lifts)
    please clarify

  23. umesh says:

    I have purchased flat 7 july 2011 in under construction & flat agreement value is 1188950 & possesion near 2 or 3 month but builder wants to 1% vat & 2.57% service tax. so can i pay?

  24. Goldi says:

    This is new trick to do legal robery . Why we should pay these tax if already goverment charged vat on each and every material . also In side flat gov. applying service tax & vat for lightbill .

    These politicians are asshole they want money from public to be in ministery . What they are going to do after getting this money nothing they will buy other parties ministers . I dont know why we take all things easiliy . Education tax , entertainment tax ,gift tax , road tax , tole naka & much more …. I hate for independence . I want the Britishers to come back…

  25. Manoj says:

    My flat cost is 15,18,400/- purchased at april 2010 & builder did not asked me still any vat amount, but i m afraid for penalty, pls suggest.

  26. Rahul says:

    Require a advise about VAT TAX to be paid by me on purchase of Flat whose agreement was made on 22-03-2010 . Cost of flat was Rs. 300000. Builder has not taken any amount against VAT from me till todate, and builder is now giving the possession for the flat. However he has now served a notice for 5% VAT for the same. So please guide about the exact amount of VAT TAX in this case as the builder has collected VAT @ 1% from the other customers who purchased the flat after 1-04-2010.

  27. ganesh bangar says:

    my agreement made in 27/03/2010  i paid all amount of sevice tax  after 1st april to 20/04/2012  my possesion date .pls tell me i am aplicable for 5% vat

  28. Jyoti says:

    Require a advise about VAT TAX to be paid by me on purchase of Flat whose agreement was made on 20-02-2010 . Cost of flat was Rs. 30,00,000. Builder has not taken any amount against VAT from me that time, and builder given the possession of the flat on 3.4.2012 as temporary.& final possesion letter on 3.6.2012. whether I have to pay 5% VAT or 1% for the same?.( it was ready possesion flat actually i.e.construction & every thing was completed physically by buider & my flat was last flat remained to be sold by builder from this schem )So please guide us about the exact amount of VAT TAX in this case.can we say that it is ready possesion flat & no need to pay VAT as per rule??? please guide .please reply

  29. anil maurya says:

    i have purchased my flat at 2011 and the construction is almost finished at this November .the builder is asking me to pay the vat and service tax for my flat . should i have to pay the vat and service tax for my new flat help me???????

  30. Dhananjay Jadhav says:

    I booked a flat in 12 flats buildng. Agreement done on 17 April 2012. Got possession on 13 Aug 2012. Sale deed is yet to be done. Pls guide on my service tax & VAT liability. Value is Rs 11.60 Lacs. 1BHK. At Nashik.

  31. Sunil kumar says:

    I have booked a flat, which is under construction, I have given 80% amount from March 2010 to till now, flat will be ready by march 2013. I have given 1% Vat and Service Tax amount is change from start to right now ( Three Times). Can you suggest me what % will be of Service Tax and applicable from which date.

  32. mahesh g basantani says:

    very helpfull to remove confusion and doubts on this subject

  33. rajesh singh says:

    i have purchased flat on september 2010 during construction and builder  commited passation will be given after 1 year but still i have not got the passation.now his asking for the additional tax which still under discation in court. so pls sajust me what step i need to take

  34. rohini says:

    hello sir ihave purchased one resale flat from investor last year builder is telling me you should pay the vat is it correct

  35. Bhushan B. says:

    Hello Sir! I have purchased a flat in Nagpur (MS) registered
    (sale-deed) on 27.06.12. Right now I am residing in the flat. Before
    the sale-deed I have not registered the agreement to sale. It’s just
    done on 100 Rs. stamp paper.
    Now, my builder is asking to pay 1% VAT and 3.09 (appx) % Service
    TAX. to him for giving the possession letter. He has not yet issued
    the letter for that, but he is asking orally. There are a no. of
    incomplete work from his side. We have not yet formed the society of
    our flat. WE are here 26 -flats in the scheme.
    Please advice me. What to do? now.What are the correct laws regarding
    it.Please guide.

  36. Bhushan B. says:

    Hello Sir!
    I have purchased a flat in Nagpur (MS) registered
    (sale-deed) on 27.06.12. Right now I am residing in the flat. Before
    the sale-deed I have not registered the agreement to sale. It’s just
    done on 100 Rs. stamp paper.
    Now, my builder is asking to pay 1% VAT and 3.09 (appx) % Service
    TAX. to him for giving the possession letter. He has not yet issued
    the letter for that, but he is asking orally. There are a no. of
    incomplete work from his side. We have not yet formed the society of
    our flat. WE are here 26 -flats in the scheme.
    Please advice me. What to do? now.What are the correct laws regarding
    it.Please guide.

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