Flats under construction are in popular demand. Reason being that they are cheaper when compared to fully constructed flats and there is no compulsion of payment in one shot.
The tax advisory experts at Ikia consulting services explain the tax structure applicable while purchasing under-construction flats. Service tax of 12.36% will be charged to flats under construction, since there is a construction service involved in the agreement between the buyer and the builder. The actual rate applicable here will be 3.09 % of the value of the property and this is not applied on the full amount of purchase price. Further, car parking spaces and maintenance charges attract service tax.
Ready-to-occupy flat is an immovable property and VAT is not applicable to the sale of such units, if the sale agreement has been entered into and payment made after the completion certificate is issued.
In a Supreme Court case of Larsen and Toubro v/s State of Karnataka & Another (Civil Appeal No. 8672 of 2013), in September 2013 it was ruled that any agreement entered into by the builder/developer before completion of construction amounts to works contract and is, hence, liable to VAT.The real estate industry will be loaded with VAT claims from authorities/Government following this judgment, and the claims were loaded with penalties due to the effect of the above case, but many a case is yet to be reported. There a quiet a few questions that arise here. Especially in a case where the flat has been sold by the purchaser, and where there are no clear contracts available on the claim of VAT between the builder and the purchaser, recovery of VAT becomes a cumbersome exercise.
So, how is VAT Calculated? VAT is payable on value of goods at the time of incorporation of goods in the works and not the purchase value of goods by the builder/developer. Further, VAT is not payable on value towards immovable property, that is, land.
Since the installments paid by the buyer comprises of value of land and building, the land value that is VAT exempt has to be apportioned correctly over various installments, to claim the exemption proportionately.
Ultimately the flat purchaser bears the cost of service tax and VAT at not less than 9 per cent on the total value of the flat, apart from stamp duty. After paying so much tax, one can only hope that the appreciation in the property value would at least match the interest on loan and the tax cost.
Source – Business Standard