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Yogi Zone

Useful articles for your finance management by our team of experts

Current Service Tax Rate, Sales Tax Rate and VAT Rate

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service tax, sales tax and vatService tax, which was introduced back in the year 1994, is the additional charge payable over and above the actual bill payment for services offered.  Back then, few services were covered under the ambit of service tax, but in the budget year of 2012, the applicability of this tax has been extended to all services except those in the negative list.

Current Service Tax Rate

The current effective rate of service tax is 12.36%. For Individuals or Proprietary Concerns and Partnership Firms, the service tax is to be paid on a quarterly basis and for any other category, it has to be paid on a monthly basis.

Service tax for builders and developers

From July 1, 2010, the Government had extended this tax to cover eight more services. One among which is the service provided by the builder for development of residential/commercial unit. As per Section 65 (105) (zzq) of the Finance Act,1994, “Taxable Service” means any service provided or to be provided to any person,   by any other person, in relation to commercial or industrial construction

For the purpose of this sub clause, the construction of new building which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction( except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorized by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force ) shall be deemed to be service provided by the builder to the buyer ( w.e.f. 1.7.2010 of Sec. 76 of Finance Act, 2010).

With this development,  the imposition of service tax has become a matter of concern for the parties involved, be it a builder/developer or the prospective buyer. Here is a brief synopsis of the scenarios where service tax comes into effect.

(A)  Sale of flats while in under-construction state – The builder is liable to demand service tax from the prospective buyer(s) if the completion certificate has not been obtained by him and the flats have been sold to the prospective buyers prior to finishing the construction of the respective flats.

(B)  Sale of flats after completion of construction – Where the builder has obtained the completion certificate and the entire consideration is received by him after the construction is over then he will not be liable to pay/collect the service tax.

Sales Tax Valuation

The construction activity includes two elements i.e. the material and the labour element. In order to arrive at the actual charge on service element, abatement/exemption has to be factored in for the material element. This means that the service tax will be applied at 25 % of gross value of commercial or residential complex or unit, comprising the service factor in the construction. However, it is important to note that, w.e.f. 08-05-2013, the Government has amended entry no. 12 to reduce abatement to 70% of the gross value of the residential unit with more than 2000 sq feet of carpet area and valuing more than Rs. 1 Crore.

Therefore, for instance, if an under-constructed flat with carpet area of 1500 sq feet is sold for Rs. 35,00,000, then service tax will be payable at the rate of 3.09% i.e. Rs. 1,08,150 ( 25% of 12.36%).

VAT

Residential/commercial units are immovable properties and does not fall under the goods category but yet Value Added Tax (VAT)  is applicable to them. VAT legislations of states such as Maharashtra, Andhra Pradesh have provisions for the imposition of VAT on an agreement to purchase a flat/unit which is under-construction.  Currently, VAT is 1 % of the gross value of the unit.

Conclusion

So, if the flat/unit is purchased after the ‘Completion Certificate’ is obtained by the builder from the competent authority, then Service tax and Value added tax need not to be paid to the builder. In other cases, these rates are applicable as mentioned above.

About the Author

Reenika is a Certified Financial Planner and has more than 6 years of experience in the financial service industry. She can be reached at expert@investmentyogi.com

 

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