The Union Budget for the fiscal year 2012-13 has raised the service tax on apartments to 12.36 % from the proposed 10.3% in the 2010 Union Budget. The new service tax is applicable to building constructions including apartment complexes, flats, row houses, and industrial and commercial complexes.

The new tax policy poses many important questions such as whether the builder or the buyer will be liable for this service tax, will payment for amenities like preferred location charges, apartment maintenance fee and parking space charges also attract service tax. Here is a breakdown of how the new service tax is likely to affect home buyers.

Applicable Service Tax On Apartments

According to the Union Budget 2012-13, under construction buildings and properties will henceforth attract a service tax. A building is considered complete only after a completion certificate has been obtained by the builders from the concerned authorities. Since most buyers book their houses when it is still under construction, all payments made by the buyer during the construction period will be taxable.

The good news is that the cost of land, materials, and other construction related expenses, which comprise around 67 % of the property price, do not come under the service tax bracket. The buyers are required to pay service tax only for the remaining 33 % of the cost of the property.

Any modification within and without a building complex will also attract a service tax, as will preferential location charges, and cost for amenities such as swimming pools, landscaping, pavements, and lakes.

Maintenance fees, if above a threshold of Rs. 5000 per month, as against the previous threshold of Rs. 3000 in the 2010 Union Budget, will also attract a service tax.

Exemption Of Service Tax

• Buyers are exempt from service tax if the total payment is made after the builder has obtained a completion certificate for the property.
• Resale of properties will not attract a service tax as the property would already have a completion certificate.
• Parking spaces will no longer attract any service tax as per the latest Union Budget.
• Construction done under the Rajiv Awaaz Yojana and the Jawaharlal Nehru National Urban Renewal Mission, as per notification no. 28/2010, dated 22nd June 2010, are also exempt from service tax.

The new service tax on apartments leaves a few doubtful questions such as whether or not a buyer is liable for service tax for partial amounts that are paid after the builder has obtained a completion certificate. Moreover, if a buyer decides to withdraw from a housing scheme, how will the service tax be adjusted on the amount refunded to the buyer? Further, if there is a significant delay in construction, will the builder be required to refund the service tax to the buyer if they choose to withdraw or the project is indefinitely closed?

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