Service Tax and VAT Calculations in Apartment Construction

Service Tax and VAT Calculations in Apartment Construction

The dream of owning a house can come to a screechy halt when the various type of taxes levied on an under-construction apartment/building gets confusing and expensive. It is very important to know how things work when buying a house that’s under construction. It is always better to first be well-informed and then set a budget.

Although a ready-to-move-in house does not create as much hassle as an under-construction apartment, there are plenty of reasons why people prefer buying a property that’s under construction rather than a ready one. Buildings or apartments that are undergoing construction are always cheaper than the ready-to-move-in flats. Even the amount for the flat can be paid along with the on-going construction time. Therefore, a buyer does not have to stress about making a full payment, all at once. When the house is under construction, one can always keep a check at its progress and make changes if he/she wants to. Having full knowledge about an under-construction apartment can save a person a lot of time. One must also find out about the service tax and VAT (Value Added Tax) that are imposed when buying a property. A service tax can be calculated on two grounds:

  • The value of the land
  • The ‘construction service’ provided by the builder

Since 15th of November 2015, the service tax that can be charged by the builder has gone up to 14.5%. Although it must be noted that the service tax is not applicable on the entire purchase amount, it is levied on only 25% of the total purchase cost. However, there are other factors that also cost the buyer extra money and the factors and charges are as follows:

  • Club membership fees @14%
  • Base price @3.5%
  • PLC(premium location charges) @14%
  • Car parking @3.5%
  • Ownership charges @14%
  • Transfer charges @14%
  • Power backup charges @3.5%

Apart from the above-mentioned factors, there are also maintenance charges, fire fighting equipment charges, infrastructure development charges, electric connection charges, etc. and, also, some of these charges are to be paid on a monthly basis.

The amount collected from the service tax goes to the central government and the revenue collected from VAT goes to the state government. Hence, VAT calculated on apartments/buildings vary from state to state. VAT can be charged only on mobile/movable goods. In the case of under-construction properties, the VAT is applied on the transfer of ownership from the builder to the buyer. Since there is no specific way of calculating VAT, many states have come up with a scheme called composition scheme. Under this scheme, the builder can set a definite amount of VAT to be paid to the government by their choice, which generally is 1% in most states. It is to be noted that both service tax and VAT are applicable when buying a property that’s under construction.It can, hence, be said that it is always better to buy a property sooner than later as the service tax keeps increasing, a stitch in time saves nine.

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