Look for hidden costs in purchase of flats
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A buyer must have a clear picture of additional costs involved , writes C.H.Gopinatha Rao
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Have a clear idea: A buyer must have a clear picture of what he has to pay.
When you decided to buy a flat, was there a point when you were sure that the price fixed with the developer was final, but ended up paying additional amount towards the end - payments that were neither expected nor disclosed upfront? Did you wish there was a firm sale price of a flat, something that assures you that there is no need for any further payments? If the answer to these questions is yes, then probably you did not clear all the payment terms adequately with the
developer nor looked for the “hidden costs” in buying a flat.
VAT and service tax are two of the additional amounts a buyer may be asked to pay when the project nears completion and when you are near handing over the flats. The statutory tax liabilities of builders vary depending on the size of the project - larger the project more are the liabilities. One of them is the service tax which is levied for commercial or industrial construction services, site formation and clearance, excavation, construction of residential complexes with more than 12 units, work contract services. The rate of service tax is 12.3 per cent on 33 per cent of the cost of construction. This works out to about 4 per cent of the overall cost of construction . This amount will be indicated in the Builder’s agreement with the buyer. If it is not, then you can ask for a clarification.
The Value added tax is another cost added to the project and is applicable to all builders. This has replaced the earlier sales tax on works contract. The builder has the option to pay two per cent of the cost of building indicated in the Builder’s agreement or compute it on item basis for all the materials at specified rates. For materials like sand and bricks the tax is four per cent and for items like cement is 12.5 per cent.
Thumb rule
Many builders of small projects prefer to pay at the rate of 2 per cent of the cost of construction . However, builders undertaking large projects say that the tax, if worked in detail, will only work out to 1.25 per cent and prefer to do that.
In short, as a rule of thumb, buyers of residential flats can take that the tax amount to be not more than 2 per cent of the sum indicated in the builders agreement where the project has less than 12 apartments and not more than 6 per cent of the cost of construction of the flat for projects with more than 12 apartments. (including VAT and service tax put together).
Another demand for additional cost is made with respect to the escalation in the cost of construction. While some reputed builders do not charge for escalation as they complete the buildings as per schedule, a few others charge for the escalation as certified by the architect engaged by them. Sometimes new kinds of additional charges are demanded from the buyers as in a project involving 100 flats at Bangalore , where the developer charged Rs. 20.000 for each flat toward advocate’s fees. Some builders demand cash for getting connection for water supply and sewerage and also for power supply. Sometimes there are also disputes regarding common area and undivided share of land. As a result, there are occasions when the buyer is asked to pay additional amount towards the difference in undivided share of land.
To avoid confusion and dispute, reputed builders quote the rate for the built up area including all taxes along with area details upfront. They make it clear that it is a firm price. A few others give the break up and make all these details known so that the buyer has a clear picture of what are the additional costs. If any buyer needs receipts for the payments and a firm price, it should be discussed before signing the agreement.
The author is former National President, Institution of Valuers.
What they say
G.R.K. Reddy, managing director, Marg Constructions:
“Nearly 30 per cent of an apartment’s cost typically goes in the form of taxes, duties, registration charges etc. These will obviously be passed on to the customer, and this ‘hidden cost’ contributes significantly to inflated building costs.”
R. Kumar, managing director, Navin Housing and Properties:
“Builders do give estimates of registration charges, service tax and other such levies beforehand. But the government tends to change the charges every now and then through circulars and G.Os. The builder cannot guarantee that these will end up being the same as the estimate.”
S. Senthil Kumar, managing director, Ganga Foundation:
“The only way to combat inflated prices is to have a simplified tax policy. One recommendation would be to waive taxes for buildings of area less than 500 sq. ft. ”
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