Service tax may lead to hike in apartment prices

Special Correspondent

BANGALORE: The service tax of 10.2 per cent on construction of residential complexes that will take effect from June 16 will not apply if a builder/developer constructs the apartments himself and sells it to different buyers.

But, if a builder/developer engages a construction contractor to build the apartments for sale to different buyers, that will attract service tax, an official with the Central Board of Excise and Customs (CBEC) has said.

Significantly, the service tax will be levied only in case of construction of residential complexes having more than 12 residential houses or apartments together with common areas and other appurtenances, says a notification issued by the Revenue Department, Ministry of Finance. The levy of service tax on service providers will jack up the costs of flats/apartments since this is recovered from the buyers or end-use customers as in the case of all other services falling under the service tax net.

If a real estate developer and builder buys a piece of land, constructs 10 apartments and sells it to 10 different buyers, there will be no service tax liability on the builder/developer.

But, if the builder constructs more than 12 apartments in the residential complex and sells it to as many buyers, it will invite service tax and this will be passed on to the buyers.

It is common practice within the real-estate industry to register the undivided share of land belonging to the builder/developer among different prospective buyers and enter into an agreement with each one of them to construct the apartment by engaging the services of a construction contractor.

In such an event, the developer engages a construction contractor to build the apartments for eventual sale to buyers. This activity will come under the service tax net. The construction contractor will levy a service tax on the builder, who in turn will recover it from the buyer of the apartment.

"It is the service of constructing apartments for somebody that attracts service tax," says K. Umesh, Commissioner, Service Tax, Karnataka.

Service providers will have the option to avail themselves of abatement and pay service tax only on 33 per cent of the gross amount charged, subject to fulfilment of conditions for services provided in the building of residential complexes.

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