Will Delhi's Service-Tax Waiver On Under-Construction Property Help Home Buyers?

Home buyers in the National Capital Region can heave a sigh of relief, at least for the time-being. A Delhi High Court's (HC) recent decision to exempt purchasers from paying service tax on under-construction properties will take a huge financial burden off of the middle-class home buyers in the NCR. The ambiguity on arriving at the service tax charges for under-construction property prompted the HC to pass the order — a move that is likely to put a dent in the coffers of a large number of developers.

However, a homebuyer will have to pay service tax if he or she opts for any value addition in the property.

The HC has also directed developers to refund the money with a six per cent rate of interest to all the buyers who had bought houses in 2012. (The tax was introduced by the Centre in 2012) .

How is service tax calculated?

According to the court judgment: "Service tax is essentially a tax on the value created by services as distinct from a tax on the value added by manufacturing goods." This means service tax is not levied on the total the worth of a property and includes the value of the land. A central levy, service tax charges are arrived at by applying two methods.

By assuming that the value of the land is 75 per cent of the value of a property. Using this method, service tax is levied on the remaining 25 per cent. For example, if you buy a house for Rs 1 crore, your developer will charge the service tax on Rs 25 lakh, considering Rs 75 lakh to be the worth of the land. Now, at the rate of 15 per cent, you will have to pay service tax of Rs 3.75 lakh to your developer. The developer would in turn submit this amount to the Central government.

The other way to arrive at service tax on house is to separate the worth of the property from the worth of the land and other services. Now, a home buyer will pay 15 per cent as service tax on the total worth of the property.

What could be the likely impact?

Buyers of under-construction properties in the NCR have been subject to a lot of trouble in the recent past. Project delays and cancellations forced many buyers to simultaneously pay house rent and the equated monthly instalments (EMIs) for their home loans. The HC move would certainly would be a breather for home buyers not only in the NCR but also in other regions. Citing the Delhi HC judgment, buyers are likely to seek service-tax rebate in other property markets too. However, the cheer may be short-lived.

Since the judgment will have a huge negative impact on developers, they are likely to challenge it in the Supreme Court. If developers have to refund the service tax charges already taken with an interest of six per cent to each buyer, most of it will have to be paid from their own pockets. This burden will, in all likelihood, be shifted to home buyers in some other form. In a nutshell, it is an adverse order for both buyers and developers.