This month you received your increment letter with a big hike in salary. Your family is very happy and to give a boost to their happiness you decide to book your property. You checked out some properties in Kalyan area of Mumbai as it is quite close to your office. Your researched well and found some very impressive properties. While asking for the quotation you get to see that the calculation consists of Value Added Tax (VAT) and Service Tax. Do you know about these taxes and its calculation?
Let us explain it both Service Tax and VAT for you.
Service Tax: The central Government of India levied the Service tax on the construction industry and particularly on the services offered by the real estate developers to customers buying property in their residential projects.
The rate of Service Tax is 14.5%. The calculation technique of service tax is not that simple as you are thinking as it needs to be calculated on different cost heads. Service Tax needs to be calculated on the components involved in the construction.
To make the process simple for an understanding of common man Service tax is calculated on 25% of the associated cost of the unit and this makes the % of service tax 3.5%.
If the unit you are planning to buy is of 2,000 sq. ft. or has a valuation of Rs 1 Crore or above then, in that case, the calculation will be made on 30% of the cost of the unit and now the service tax gets enhanced to 4.2%. Apart from this, the service tax will be calculated on the complete amount of the costs like:
- Preferred Location Charges (PLC)
- Floor Rise Charges (FRC)
- Initial maintenance charges
- Clubhouse
For all above cases, the ST will be 14.5%. The costs on which service Tax is not calculated to include:
- EDC/IDC and lease rent ( Portion which is paid to state government)
- Parking charges
To conclude with the discussion of Service tax we can say such tax need to be paid by buyer only in the case where the purchase is made directly from the actual developer of the property. If you are going to opt for a resale property which is under construction or completed then you are not supposed to pay the service tax.
VAT: VAT is basically for the sale of goods which are movable properties. By movable property we mean to say the property which will get transferred from developer to the actual buyer. Taking into consideration an under construction property the rights of ownership gets transferred in the form of sale agreement from developer to the buyer. This is not for all states in India, but only for selected few. Governing of the tax is done under ‘works contract’ for VAT law. Let’s take few examples:
- If you are in Mumbai or say in Pune then it will cost you 1% on the value of agreement as VAT
- If you are opting for a property in Bangalore then it will cost you 5% on the value of agreement as VAT
- If you are opting for a property in any of these locations like Noida-NCR, Chennai, and Kolkata then you will be exempted from VAT
It is the sole responsibility of the developer to make the deposition of the VAT as well as service TAX, but every possible effort is made to recover the same from the home buyers. It is must for you to check the sale agreement in detail in case you are not ready to pay it or builder will surely include it.
Exemption of VAT and Service Tax:
- No ST applicable for independent house – for example, Villa, Independent house or Bungalow/Kothi
- No ST for affordable houses having carpet area of 60 Sq Mt
- VAT varies from one state to other and so calculation and exemptions need to be considered based on that.