How are Calculate VAT and Service Tax on Under Construction Property in India

If you are searching for a flat to buy and trying to have a budget for it, you must also include service tax and Value Added Tax (VAT) in the budget, apart from the price of the flat and the stamp duty. Under-construction property is a popular investment option as well. They are more cost-effective than ready to occupy apartments. Also, they are more convenient for buyers, because you can make payments in da staggered mode as the construction advances. Therefore, the need to pay the whole amount at once is not there.

At present, service tax on property and VAT on property apply to all under-construction transactions for the property. The actual value of these two can be different in different Indian states. An under-construction property has three cost components.

  • The first one is the land cost, which has no VAT and service tax.
  • The second component is the material cost, which has VAT.
  • The third component is the construction cost and includes labor charges and is treatable as a service that the developer provides to the buyer. So, service tax can be levied here.

Read on to find out about these taxes and their calculation.

Read this also- All You Need To Know About Home Loan Tax Benefits

Service Tax on Construction Property 

The Central Government levies service tax on the construction services provided by the developers to the person(s) buying the property. Currently, the service tax on a flat is charged at 15% in India. The base cost of the property includes the construction and the land cost. Service tax is charged only on the construction part.

From 1st April 2016, the government standardized the service tax at a uniform 70%, and this makes the effective service tax for residential flats to be 4.5%. On other cost items, like Floor Rise Charges or FRC, service tax is applied on the entire amount. In these cases, it is 15%. External development charges, infrastructure development charges, and lease rent paid to the state government, as well as parking charges,  are excluded from service tax.

Vat on Construction Property

The VAT is applicable on the sale of moveable properties. If a sale has to have VAT, it should have a transfer of goods from one person to another. When we talk about under-construction properties, this is the transfer of ownership rights from the developer to the person buying the property through a sale agreement, in some states. For example, VAT on a flat is charged at 5% of agreement value in Bangalore, 1% in Pune and Mumbai, but there are no VAT charges for apartments bought in Chennai, Kolkata, and Noida.

Who pays the taxes?

Technically, it is the developer’s responsibility to pay the VAT and service tax to the government, but often they recover this amount from the property purchasers. It is dependent on the agreement you make with the developer. If you do not want to pay these taxes, you should ensure that this is mentioned in the sale agreement.

You should also note that with the implementation of GST, under-construction properties will have a rate of 12% - this is the current rule put in place by the Government.

Aadil Saif

I am Adil Saif working with AddressOfChoice Realty Private Limited as a Digital Marketing Expert. I have 8 Year Experience in same field. I love to share blog and Article.