Your dream home is now going to cost more. Simply because home buyers are now going to bear 10.3% service tax on properties under construction
– as proposed in the Budget 2010 — which will lead to a tax outgo of 3.4% of the sale value of the house, according to experts.

Gaurav Karnik, associate director-real estate practice, Ernst & Young, says, “The Budget has proposed an amendment in the definition of two existing taxable service categories — ‘commercial and industrial construction’ and ‘construction of complex services’. This amendment provides that unless the entire consideration for the property is paid after the completion of construction, the activity of construction would be deemed to be a taxable service provided by the builder/ promoter/ developer to the prospective buyer and the service tax would be charged accordingly.”

Through this amendment, the government seeks to create a legal fiction whereby it deems any advance consideration charged by builders/ developers from buyers as consideration for service of construction of immovable property for and on behalf of the buyer rather than a construction for self for subsequent sale to the buyer.

The amendment would in effect bring all agreements in the nature of sale of immovable property (eg Flat Buyer Agreement) –where any advance payment is received by the builder/ developer prior to the completion of construction — under the service tax. It would, thus, entail the payment of service tax on the sale price collected by the developer from the buyer, having the direct effect of increase in the real estate prices in the hands of the customer. Experts believe this would adversely affect the real estate sector, particularly when it was just beginning to show the signs of recovery.

Further, the proposed amendment may have a deep impact on how real estate transactions are structured in future due to issues relating to the valuation for the purposes of service tax levy. Instead of a single sale price, the consideration may be broken up into cost of construction and land so that service tax may be paid only on the value of services involved in the construction.

“While currently the law also provides an option of paying service tax on 33% of the total consideration in respect of construction contracts, the same is grossly inadequate in the present context as it does not take into account the value of land involved (which, based on location, could form a major component of the sale consideration),” says Karnik.

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