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Service Tax and its Calculation

28 Mar 2016

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Service Tax and its CalculationBuying a residential property is one of the biggest purchases in an individual's life and a long-term decision. The job can become more tedious if one is not familiar with the various tax aspects related to property buying. One of these is the service tax, which a buyer has to pay to own his home. In fact, it is levied on the cost of all the services provided by any business.


Service tax is decided by the Central Government. In the real estate space, service tax is paid only for under-construction properties and not for ready-to-move-in or resale properties. A property is called "under construction" until the builder has received a completion certificate from the relevant authorities. If the builder has already received the completion certificate, there will be no service tax imposed on the property purchase because in this case, the property is called a ready-to-move-in property.


Service tax is imposed on properties under construction due to the construction services offered by the developers to buyers. For ready-to-move-in or resale properties, there is no service provided as a complete house is provided to the buyer.


Exemption from Service Tax on Properties Under Construction

One is exempted from payment of service tax on properties under construction in the following cases:


   - Construction of single residential unit, i.e. a home designed to be used by one family only
   - Construction of low cost houses up to carpet area of 60 sq. meter


Calculation of Service tax

While buying a property, two components are included in its cost; one is the value of the land and the other is the construction services offered by the developer. Service tax is levied only on the construction services offered and not on the value of the land.


Effective from 1st June 2015, the government levied a service tax of 14% on all services availed in India. Thus, for properties under construction below Rs.1 crore or less than 2000 sq. ft. area, the service tax applicable is 14% of 25% of the total agreement value. For properties under construction that are valued at or above Rs.1 crore or are over 2000 sq. ft. area, the service tax applicable is 14% of the 30% of the total agreement value.

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