Value Added Tax (VAT) on Property : Know all the Calculations

Applicability of service tax and VAT on Property

In terms of cost components, an under-construction property may be split into three sections. The first element is the land cost, which is exempt from both VAT and service tax. The cost of materials is the second element. The third component is the building cost, primarily comprised of labour costs and may be viewed as a service provided by the builder to the Buyer. As a result, service tax can be applied to this item.

Basis of computation

So because the total value of the agreement cannot be considered a labour contract or services supplied by the builder, VAT and service tax on construction cannot be applied to the entire value of the agreement. The tax at the appropriate rates can be paid if separate material and labour expenses are kept. However, while maintaining different records is complex, the regulations offer an excellent foundation for calculating these taxes.

The legislation enables you to choose a service component of 30% of the agreement’s value and pay the service tax on that percentage. As a result, the service tax charges in India levy effectively equal 4.50 percent of the agreement value (i.e., 30 percent of 15 percent). Service tax is applied to the total value of other services, such as the supply of a garage, premiums for higher floors, and so on, in addition to the cost of building.

Since VAT is a state-level issue, each state has its unique set of VAT legislation. To compensate for the difficulties in determining the precise cost of materials in the agreement amount, conditions such as Maharashtra allow for VAT paid on the total value of the agreement through a “composition scheme.” The VAT rate under this composition system in Maharashtra is 1% of the entire agreement value.

Nature of the VAT

A value-added tax (VAT) is a consumer tax levied on a product when it significantly contributes anywhere along the supply chain, from manufacturing to selling. The amount of VAT that the customer pays is calculated based on the product’s cost, less any previously taxed component costs.

VAT (Value Added Tax) is a tax on consumer spending that is levied indirectly. It generates significant and consistent tax income. It aids in the reduction of tax avoidance. The consumption tax is another name for it.

Value Added Tax (VAT) Attributes

VAT is an example of indirect taxation. It is assessed against imports and their value but not against exports and their value.

Although some nations use different ratios, it is a total tax amount at a fixed rate via a standard ratio throughout the entire country.
VAT applies to each item’s value-added at every distribution and production stage. It will apply for unmanufactured and produced things alike.
A value-added tax (VAT) is founded on the idea of value addition. Value-added can be calculated through addition of payments to production factors (e.g., wages added to profit added to interest rates) or subtracting the cost of inputs from the income derived from sales.
It can be used to replace sales taxes, hotel taxes, contract taxes, and entertainment taxes. It’s a tax across multiple points that helps offset the tax you pay on your purchases.
It is based on a self-assessment system and includes tax credit and refund options. It is a broad-based tax that applies to all products and services, regardless of whether they are produced domestically or brought from outside.
It has a catch-up impact and prevents the cascading effect of sales tax. It is a tax in which the government participates in issuing the same as part of efforts to draw capital and investments.

How Immovable Property Should Be Taxed?

Section 2(14) of the Income-tax Act of 1961 (‘the Act’) classifies immovable items such as plots of land, residential flats or homes, commercial buildings, and so forth as Capital Assets gains deriving from their transfer are taxed.

Furthermore, under the Act’s requirements, immovable property designated as Rural Agricultural land is not regarded a capital asset. Hence, gains deriving from its transfer are not taxed.

Immovable property may be a reliable source of income, a profitable investment, and a kind present to loved ones. It is essential to comprehend the different tax consequences to get the most out of one’s money without becoming entangled in a tax maelstrom.

Who is liable to pay VAT in India?

Even though the builder must deposit VAT and service tax on real estate property to the Government, builders frequently recoup the expense from customers. In the end, it is determined by the terms of the builder-buyer agreement. If you want to bypass VAT on house rent and service tax, make sure the builder is aware of your wishes in your contract.

Exemption

The building of a single residential unit, such as an independent home, villa, or bungalow, is exempt from service tax on Property in Maharashtra. In addition, there is no service tax for inexpensive housing. As a result, it is inappropriate in housing complexes with up to 60 sq m per house with carpet areas. Because the VAT on under-construction Property in Haryana is governed by state legislation, its applicability and exemptions differ from one state to the next.

The expected GST regime

The Goods and Services Tax (GST) is an indirect tax implemented in India on July 1, 2017. It replaced various cascading taxes imposed by the national and state governments. The Union government intends to implement the Goods and Services Tax on Hyderabad (GST) apartments at a uniform rate across the country, which has yet to be determined.

No separate VAT/service tax charges are to be borne on realty transactions. Whereas these taxes were already not applicable to apartments that are ready to move into and even resale apartments, GST will naturally be levied on under-construction homes at a single rate that is fixed in place of the VAT on under-construction Property Maharashtra and service tax.

GST will be charged at a rate of 12% only on under-construction properties beginning July 1. According to real estate specialists, property taxes and stamp duty will exist for all assets of an immovable nature.

As there was so much complexity and computation of numerous taxes, the government came up with the new notion of GST, which stands for goods and services tax at a flat rate. So the GST reform has brought a lot of good change and relief since real estate transactions will no longer be subject to a separate service tax on the sale of immovable Property or VAT, and GST will be charged at a set rate.

Service Tax & VAT on under-construction property

Service tax

The Buyer pays a vat and service tax on property to the government in exchange for the services provided by the developers.
In India, the current service tax rate is 15 percent.
Service tax is charged on the construction component but not on a bungalow, villa, or single-family home. It is also not set on ready-to-move-in apartments because no service is provided.
Service tax on the land sale is not levied on low-cost housing of up to 60 square meters per dwelling in a housing complex that has received clearance from the relevant authorities.
Since April 1, 2016, the government has set a universal 70 percent reduction for services related to constructing a complex building, civil structure, or a portion thereof, subject to the fulfillment of additional requirements.
As a result, the effective service tax on the residential property now stands at 4.5 percent.
Another element, such as floor rise prices, preferred location rates, and clubhouse charges, is subject to a 15% service tax, but parking expenses are not.
The state government is compensated for external development, infrastructure development, and leasing rent.

VAT value-added tax

Vat is charged on moveable properties when items are transferred from one person to another, but it is not set on moving rights from a developer to a buyer in the form of a sale agreement.
Vat is not applied to flats that are ready to move into.
In Mumbai and Pune, vat is now paid at 1% on ‘agreement value,’ although it varies by state. The tax is controlled by the VAT law’s definition of a “work contract.”
The party responsible for the costs is expressly specified in the selling agreement.

How to calculate service and VAT tax on under-construction property?

Only properties that are booked at the under-construction stage are subject to service tax and VAT. Here’s how to calculate vat in a construction company and determine how much service and VAT tax you’ll have to pay on a home that’s still under construction.

Any under-construction property has three cost components if the whole project cost is divided flatly. Land cost, material cost, and labor + service cost are the three cost categories (approx 25 percent). However, the cost breakdown may differ from project to project, however on average, and the cost breakdown remains consistent. For an under-construction property, you may receive this break-up from the builder. However, builders are hesitant to reveal.

Only 14.5 percent VAT is applied to material costs, whereas 12.36 percent ST is applied to labor and service costs.

When you buy a home, you pay for two things: the house and the land.

Value of land
Construction offered by the developer (service provider)

Only building services are subject to service tax, not the value of the property. When determining the cost of immovable property and service costs separately is problematic, the government has established an abatement system in which an amount is imposed on the whole sum.

VAT charges

The property vat rate fee differs from one state to the next. In Karnataka, the VAT on construction-related services is now 5.5 percent.

Frequently Asked Questions (FAQ’s)

Is VAT applicable on the under-construction property?

Only properties that are booked at the under-construction stage are subject to service tax and VAT. As a result, none of the service tax on the construction of residential complexes may be imposed on houses acquired after the builder has received their completion certificate. In the same way, there is no service tax or VAT on completed homes developed as a resale.

What is VAT service tax on a home purchase?

Service tax on construction contracts is a tax levied on the services supplied by the service provider. The tax is collected from the customer and deposited with the government by the service provider.

Is VAT charged on property sales?

The VAT is a state-level issue, some states collect VAT on the sale of under-construction property, while others do not. The Buyer is required to pay VAT to the Seller, who then deposits it with the government.

Is VAT applicable on the sale of flats?

When a wholly completed flat builder gets into an agreement to sell it to a buyer, the transaction is treated as a sale of immovable property, and there is no debate about whether or not sales tax should be applied.