What The Service Tax Hike Today Means For Homebuyers

True to Finance Minister Arun Jaitely's announcement in the Union Budget 2015-16, the service tax has gone up from 12.36% to 14% today. If you are looking to buy or invest in a home this year, this increase is too significant for you to ignore. The central government levies service tax on construction services and also on various transactions involved in purchasing or a building a house.

In practice then, how would the hike in service tax affect home buyers and real estate investors like you?

More expensive under-construction flats

If you plan to buy or invest in a flat under construction, do think of the costs that are involved. With the service tax hike today, flat buyers will have to pay service tax on the cost of construction. It is useful to know that the value of land is not subject to service tax but since the builder provides construction services, he is expected to pay service tax on them. Naturally, the additional costs incurred by the developer/builder will be passed on to homebuyers. However, construction of ready-to-move-in flats will be cheaper than under-construction flats as builders get service tax exemption on such properties. Be sure to ask for the construction completion certificate issued the local issuing authority from the builder before buying a ready-to-move-in flat to avoid paying the additional costs.

Lower service tax for flats priced less than Rs 1 crore or 2000 sq ft

If a flat under construction is worth less than Rs 1 crore or has area lesser than 2000 sq ft, service tax is usually levied on 25% of the gross value of property. Construction costs are hard to assess and for sake of convenience, the government assumes that construction costs form around 25% of the gross value of a flat. Till March 31, 2015, the service tax on a flat worth less than 1 crore was 3.09% of its gross value (3.09% is 12.36% of the 25% of the gross value of the flat). But, from April 1, 2015, the service tax will be 3.71% (3.71% is 14% of the 25% of the gross value of the flat).

Higher service tax for flats worth more than Rs 1 crore or 2000 sq ft

If a flat under construction is worth more than Rs 1 crore, or has area greater than 2000 sq ft, service tax is levied on 30% of the gross value of the flat. Till March 31, 2015, the service tax of a flat worth more than 1 crore was 3.71% of its gross value (3.7% is 12.36% of the 30% of the gross value of the flat). But from April 1, 2015 onward, the service tax will be 4.2% (4.2% is 14% of the 30% of the gross value of the flat).

Higher costs of housing amenities and services:

Service tax is also levied on other services which builders provide in the housing projects they construct such as car parking, rain water harvesting, club membership, preferential location, electrical installation and fire-fighting equipment installation. Service tax is also levied on the services offered by real estate agents, lawyers and consultants and also for the processing fee of home loans. Thus, the hike will push the prices of amenities and other related services.

However, the low cost houses and single residential units are exempted from the hike. Low-cost houses with a carpet area less than 60 sq mt per house in housing projects are also exempted from service tax, provided that these low-cost housing projects are approved by a recognized authority.

As service tax is now raised, demand for ready-to-move-in flats is likely to go up, and under construction flats might be less in demand. Many believe that the service tax hike will make fully constructed flats a better option for homebuyers. But, it is also likely that with rising demand, fully constructed flats may end up becoming more expensive.