For the average home owner in the Garden City, the Bangalore apartment service tax of 12.36% is a huge amount to pay, apart from the cost of the flat. Service tax in real estate is a tax that is payable on the services provided, i.e. the property itself, by the purchaser to the developer of the property.
The Service Tax Act Section 65(105) directed the builders and developers of under–construction properties in the Garden City to pay Bangalore apartment service tax whenever they sell the apartments to buyers. When it comes to properties under construction, there are two parts to the selling price of the property – the construction cost and the land value. Since the broad definition of service tax includes only goods and services and not immovable property, the government has issued an abatement scheme for imposing service tax in real estate transactions concerning under–construction property. According to the Union Budget 2010–11, the government allowed for an abatement of 75%, which meant that service tax would be levied on only 25% of the total sale price of the apartment. The abated value also represented the service component in case of under–construction activity. Hence, the effective rate of service tax came to 12.36% X 25%, which is 3.09% of the total transaction value. Hence, for instance, if the price of the property is INR 40 lakhs and its size is 1,300 sq. feet, then the service factor value is = 40,00,000 X 12.36%, that is INR 4.944 lakhs. The total service tax factor in this property’s case will be 25% X INR 4.944 lakhs that is INR 1.236 lakhs.
However, from 1st March 3013 onwards, the Bangalore apartment service tax rules have changed. The government then directed that flats and apartments which are valued at INR 1 crore or more or those who have sizes exceeding 2,000 sq. feet, service tax rate applicable to them is 30% of the gross value, as against the earlier 25%. Hence, the service tax factor from 2013 onward changed to 12.36% X 30%, which is 3.71% of the gross transaction value. The only stipulation to the abatement was that the gross value charged from the buyers of apartments should include the value of the land on which the property has been built. Additionally, for the certain facilities that the developer provides such as fire-fighting equipment, electrical installations, club membership, car parking or even preferential locations, the abatement isn’t available. Hence service tax applicable on all these facilities is at the full rate of 12.36%.
However, buyers of apartments in the Garden City need not despair. The budget also said that those developers who had been selling apartments under construction without obtaining the completion certificate needed to pay service tax, while those who’d obtained the completion certificate didn’t need to. Hence, the only scenario wherein buyers do not need to pay service tax for under–construction properties is when they buy the properties after their developers have obtained the completion certificate for the project from the local authority.
In this era of increasing guidance values in the Garden City, ready-to-occupy flats are the way to go.
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