Construction services tax to raise cost of apartments

[mkpawar]

Are we going to be affected...

http://economictimes.indiatimes.com/markets/real-estate/news-/Construction-services-tax-to-raise-cost-of-apartments/articleshow/5629563.cms

Construction services tax to raise cost of apartments
2 Mar 2010, 0000 hrs IST, ET Bureau


MUMBAI: The Budget proposals have thrown up a dampener for the housing industry. Construction services have now been brought under the ambit of the
service tax in an unexpected move that would raise cost of apartments that are still under construction. As per the Budget proposal, the finance ministry has suggested that construction would be deemed to be a taxable service if the building or complex is still under construction and approval from the concerned regulatory authority — which in most cases is the resident municipal authority — hasn’t yet been granted. The levy would cover all construction of complex service or commercial or industrial construction services, the Finance Bill suggested.

The service tax levy would be 10.3% and would also apply to additional services such as those offering preferential locations for flats in multi-storey buildings where flats in each floor are priced at a premium due to their location. This too has been described as a service and hence taxable, according to the proposal which was tabled in Parliament on Friday by finance minister Pranab Mukherjee. The premium is typically levied on categories such as flats or apartments that are above a certain floor rise or have other high value locations such as being in front of a garden or a sea or any other preferred locality.

“The proposal is to tax construction if the entire payment for the flat is made before completion of construction,” said consulting firm RSM Astute executive director K H Viswanathan. “This would increase the cost of the apartment and may discourage potential buyers.” The service tax would be 10% on 33% of the price of the apartment, while on the remaining 67%, tax won’t be levied.

Till now, for all apartments under construction, customers paid in instalments based on plinth level construction and also on the progress in building activity. Banks too lent money to the customers according to the requirement of the builder. Now most developers would ask customers to pay the entire value of the building if they sought to lock in at a certain value. This would mean paying the entire sum before the construction. Typically, in cities such as Mumbai, where there is a pressure on space and hence apartments and flats are much sought after, customers booking for flats in an under-construction building, is very common. “The service tax and excise duty hike on cement would increase the overall cost of apartment by about 10%,” said Dharmesh Jain, managing director of Nirmal Lifestyles, a Mumbai-based developer. “It’s a negative step and we are considering to meet the finance minister to plead for a relook on this measure,” he added.

But there are other positive measures that the Budget proposes such as allowing pending projects to be completed within a period of 5 years instead of 4 years, for claiming deduction of profits, as one time interim relief. There is also a suggestion that the commercial area included in a housing project would now be 3% of the aggregate built-up area of the housing project or 5,000 sq. ft, whichever is higher, compared to the existing limit of 2% and 2,000 sq.ft. respectively. This would help developers and real estate companies to make their projects more viable.

[ddamitav]

indeed we are but to what extend?

[gaurgupta]

Hi everyone,

Yes, we all would be affected because of introduction of service tax on under construction appartments. The extent would be as follows....

10.30 % of 33% of the total payment made to builder before obtaining completion certificate (which is normally the practice in India).

Just to give you a view in respect of Savana project 2BR + 1 specification apartments, if the basic cost is 1303 sqft. x 1600 i.e. Rs. 20,84,800 plus additional charges (PLC + IFMS + Car parking + Power Backup + Club) which is somewhere around Rs. 4,34,783 totals to be Rs. 25,19,583. Assuming all this amount is paid before possession or obtaining completion certificate, then the service tax @ 10.3 % of (33% component of total payment to builder, i.e. Rs. 8,31,462) would come to Rs. 85,640

Hope this clarifies your understanding.

Best regards,
Gaurav

[webmaster]

Thanks Gaurav for the detailed explanation.

@mukesh - Thanks for posting this important information on the forum. Also I have the updated the original post with the details.

[anuj_bansal]

http://www.livemint.com/2010/07/0222025 ... l?atype=tp

As per this link, service tax is noly for payments made after 1st July 2010. It needs yo be checked with RPS, if they will take this tax at then time of handover or if it will be taken as and when the next payment is done for consturction linked plan

http://www.business-standard.com/india/ ... er/400076/

Also as per the above link, service tax will be on 25% of the total property cost. Not sure if the same would be applicable to us ie only 25% of the remaining amount will be considered for service tax.

Anuj

[webmaster]

Email update from member Mukesh Pawar.

Dear Sir/ Madam,

The provision of service tax is applicable on all under construction projects w.e.f. 01/07/2010. We are waiting for further clarification from govt. Authorities with reference to exact amount which would be subject to charge of Service Tax. Necessary updates will be made available as soon as we get further details. However as per general opinion the amount paid till June 30, 2010 might not be covered.

Thanks

RPS Infrastructure Limited
A-193, Ist Floor, Okhla Industrial Area,
Phase-I, New Delhi-110020,
Telefax : 011-40543200 (30 Lines)
E-mail : info@rpsgroupindia.com
Website : http://www.rpsgroupindia.com

-------Original Message-------

From: Mukesh Pawar
Date: 7/3/2010 8:37:33 PM
To: RPS Group
Subject: Re: Service Tax on Sale of Flats/Builder Units

As I understand, it is only applicable to flat sold on/after 1st July 2010. Is that correct?


Thanks,
Mukesh Pawar

On Sat, Jul 3, 2010 at 4:45 AM, RPS Group <info@rpsgroupindia.com> wrote:

Dear Sir/Madam,

Please note that Service Tax has been levied on sale of Flats/Builder units w.e.f. 1st July, 2010. Therefore the same is payable by customers.

Thanks & Regards

RPS Infrastructure Limited
A-193, Ist Floor, Okhla Industrial Area, Phase-I,
New Delhi-110020, Telefax : 011-40543200 (30 Lines)
E-mail : info@rpsgroupindia.com
Website : http://www.rpsgroupindia.com

[anuj_bansal]

Today there is a article in rediff regarding the service tax. Some points to be noted:
- This tax is applicable only on 25 per cent of the construction value.Service tax, therefore, would be on 25 percent of the value of the property and not on the entire cost. Tax would be applicable only on the cost of labour or services of the builder or developer. All costs of land and construction material of the property would not fall under the purview of service tax.
- No service tax would be applicable for the amount paid for such parking slots.
- Builders many times will build internal roads, pavements, or maintain gardens for the development of the property complex. Such services would attract a service tax. Also any additional amount paid for a floor rise, an apartment with a specific number or a specific direction, apartment facing either a park, pool or sea, would cost the buyer a service tax.
- The division of construction costs versus labour costs is undertaken by the builder on his own accord and is subject to being under his terms.

Link - http://getahead.rediff.com/slide-show/2 ... to-you.htm

This would mean the tax that we have to pay will be very minimal, but the ultimate decision of the tax amount will be in the hand of RPS, who we know is a big cheat