Service Tax & VAT in Real Estate!

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Project delays and cancellations are not the only issues that buyers of under-construction properties in India have to worry about. Their mathematical genius would also be put to test at each stage of tax calculations.  It has to be noted that you have to pay the service tax and the value-added tax (VAT) if you are investing in an under-construction property.

If you are buying a home in any city of Karnataka and want to know all about KVAT, you may be in for a fix and will have to use a lot of your imagination to decide which “schedule” the home-buying process falls into. It is all open to interpretation, and even chartered accountants may fail to point in one direction.

For example, your developer may ask you to pay VAT at 5.5 per cent under Schedule III, because material used in construction (bricks, sand, metal, etc.) are kept under this category. However, as the term construction is not clearly mentioned anywhere, you might be charged VAT at 14.5 per cent. This rate applies to things not covered under any schedule. What else? An end note adds that you will have to pay VAT of 14 per cent for “all other works contracts not specified in any of the above categories”. The developer may have his pick unless you carefully read the purchase agreement and ask for a correction.

It has to be noted that VAT is a multi-point levy, charged for any value that is added to a project. In case of real estate, developers have to pay this levy to the state government for the manufacturing part of the work. While the value of the land is excluded, services tax is levied on labour and other services.

Service tax, on the other hand, is a central levy and is uniform across the country and under the composite scheme, your developer will charge you service tax at 3.09 per cent of the total contract value. This means that service tax will be charged at 15 per cent of the total contract value, and if the service costs of the unit is kept at 25 per cent of the total value, you will have to pay the tax at 3.09 per cent.

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