Service Tax on under construction property – To Pay or Not?

As per the new rules, Service Tax will be calculated at the rate of 12.36 percent of the gross value of the property. But, because there is a Government abatement of 75 percent (increased from 67 percent), tax will be levied only on 25 percent of the gross value of the property. The effective rate of service tax is therefore 2.575 percent.

Also read: CBEC to target 12 lakh non-filers of service tax: FM

The 2010-11 budget imposed service tax on all under-construction properties from July 1, 2010. Now, according to the Service Tax Act [Section 65(105)], the developer or builder of an under-construction property has to pay service tax when he sells a property to a buyer. There is only one situation in which the builder does not have to pay service tax when he sells an under-construction property: When he sells a building after a completion certificate is obtained from local authority and entire consideration is obtained from the buyer only after building completion certificate is obtained.

Therefore, although paying Service Tax is mandatory, it can be avoided if:

a. The builder has obtained a completion certificate from the issuing authority.

b. The buyer has paid the entire consideration only after the building completion certificate had been obtained by the builder.

Please note that you can even get the completion certificate from an architect or chartered engineer or licensed surveyor. It is not necessary to go to a Government authority to get the completion certificate. You may rely on the notification issued by the Government of India (D.O.F.No.334/03/2010-TRU) which reads as follows:-

“Before the issuance of completion certificate if agreement is entered into or any payment is made for sale of complex or apartment in residential complex, service tax will be leviable on such transaction since the builder provides the construction service. Completion certificate issued by a Government authority was prescribed as demarcation by introducing an Explanation in the Finance Act. During the post budget discussions, it was pointed that practice regarding issuance of completion certificates varies from state to state.

Considering the practical difficulties, the scope of the phrase ‘authority competent’ to issue completion certificate has been widened by issuing an order for removal of difficulty (Refer M.F.(D.R) Order No.1/2010 dated 22nd June 2010). Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.”

However, this exemption above is only from paying Service Tax. You will have to pay Stamp Duty on the sale value of the property if you purchase property after construction.