Need To Know: Service Tax And VAT On Under-Construction Flats In Chennai

Ever since its announcement in April 2005, Value Added Tax (VAT) has been received by consumers as a nasty and rather unnecessary tax. It has bugged you while paying bills when you went out to dine in the past but now, it is all set to affect the price of the property you buy. According to a recent ruling of the Supreme Court, you will have to pay the tax at the time of possession of property in Chennai, if your flat is under construction.

Special services accompanied by VAT

Extra charges will have to be paid to the builder as service tax, which will eventually be given to the service tax department. According to the Finance Bill 2010, a builder can charge service tax if he provides one of the six defined special services. Special services can be anything from choosing a specific area, demanding parking space to development of complexes etc. The service tax, if the flat's purchase agreement was signed after March 2015, is charged at 14% of 25% of the value of the property. This means, the tax is 3.50 per cent of the value of your property. However, if it is valued at more than Rs 1 crore or has an area of 2,000 sq. ft., the service tax is charged at 14% of 30% of the value of the property. This means that the service tax is 4.2% of the value of the property.

The Central Board of Excise and Customs' (CBEC) circulars have further asserted the reason for this tax. Insertion of an explanation will be attached to cases where the construction is yet to start, is in full swing, or has been completed but awaits the completion certificate, and the buyer makes payment to the builder for a residential project in Chennai. It will not affect the transactions in which the payments have been made before January 7, 2010.

Exemptions from paying service tax

However, there are a few exceptions where you won't have to pay the service tax for property for sale in Chennai. Service tax exemption will be provided to constructions done under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana. The tax also does not apply if the VAT is payable on contract. If a residential building is being constructed for the personal use of a government employee, the service tax will not be levied. This was announced in an agreement between the Union Ministry of Urban Development and National Building Construction Corporation Limited (NBCC).

How to avoid the added expense

To avoid spending more money, you can buy a constructed property. Prices would vary for constructed and under construction properties in Chennai by large margins, depending upon the special services you choose and how much your builder charges you for it, keeping in mind the VAT requirements. Although you will still have to pay stamp duty for constructed property, avoiding paying the service tax and VAT would help you save a lot of money.