Is my Real Estate Investment liable to Service Tax?

Service Tax is an Indirect Tax applicable on all services except those covered in negative list. So it is also applicable on construction service. When the Service Tax on under construction property was first levied, many Real Estate Developers and Builders had appealed to the Courts against the applicability of Service Tax on Under Construction Property and the Court had also issued a Stay Order for the same. But, the Courts eventually decided in the favour of the Govt. and hence Service Tax on under Construction Property is now liable to be paid.

Thus, if you book a property before it has received the certificate of completion (Building Use permission) from the competent authority then service tax is leviable. But if you invest in real estate where certificate of completion has been issued then service tax is not applicable.

When to pay Service Tax?

Service tax is required to be paid as and when the builder raises the invoice on you for such services.

Is there any Exemption from Payment of Service Tax on Construction?

Yes, exemption from Service Tax on Under Construction Property is available in circumstances pertaining to services provided in the following cases:-

1. Construction of a Single Residential Unit

2. Construction of Low Cost Houses up to a carpet area of 60 sq. metres per house in a housing project approved by competent authority.

How to Compute Service Tax on under-construction property?

At the time of sale of property, the amount paid by the purchaser to the Builder is for:-

1. Value of Land

2. Construction Service provided by the Builder/Developer

Service Tax can only be levied only on Services and not on sale of goods/immovable property & therefore Service Tax cannot be levied on the Value of Land. It can be levied only on the Construction Service provided by the Builder/Developer. 

The Service Tax on construction is levied at 12.36% on the total value of services i.e. on value of construction services. It is not levied on the value of land.

But if the property value cannot be segregated as 

a) Value of Land and 

b) Value of construction services

Then a flat rate of 3.71% is applied on the entire value. Whereas on residential property having carpet area of less than 2,000 square feet and the consideration value less than Rs. 1 crore, the rate of service tax is 3.09%.

The details on levy of service tax on property have been summarized in the table below:

COMPUTATION OF SERVICE TAX ON UNDER CONSTRUCTION PROPERTY
Particulars	Abatement Allowed	Taxable Component	Normal Rate of Service Tax	Effective Rate of Service Tax
Residential property over 2000 sq. ft. OR value more than Rs. 1 crore.	70%	30%	12.36%	3.708%
Sale of Commercial property.	70%	30%	12.36%	3.708%
In all other cases except specifically exempted (as mentioned above)	75%	25%	12.36%	3.09%