How VAT On Under-Construction Flats Is Calculated In India

Value Added Tax (VAT) and service tax are two charges that are levied on under-construction flats but not on fully constructed ones. This is because these two taxes are applied on an increase in the value of an article at each stage of production and distribution. While a service tax of 14 per cent is levied on properties across India, VAT charges vary from state to state.

VAT is also paid on transactions that happen in under-construction properties. This is so, because property is transferred from one person to another. But, if you buy a flat after the completion certificate is issued, you do not have to pay VAT.

As VAT is levied on under-construction properties in India and the recent hike of service tax from 12.36 per cent to 14 per cent, some experts believe it makes more economic sense to buy a fully constructed flat. Moreover, when you buy a fully constructed flat, you would be able to verify whether it has all the amenities promised and ensure that your flat is up for possession on time.

Even though the method of calculating VAT varies across India, there are fundamentally two methods used to do this. In some states, VAT is levied as a certain per cent of the contract value of the flat. In many states, it is one per cent of the contract value. In many other states, it may be much higher.

In some states, VAT is levied as a certain percentage of the cost of the materials used in the construction process. For example, if the cost of the materials used in construction is 30 per cent of the total value of the flat and considering a VAT rate of 14 per cent, the overall VAT will be 4.2 per cent (i.e. 14% of 30) of the total cost of the flat.

While developers pay VAT, the burden is eventually transferred to the buyer in the form of higher costs. In the builder-buyer agreement, it would be mentioned whether the buyer will have to pay VAT or not. When you pay VAT, the developer is expected to give you a separate receipt for the payment.

In September 2013, the government ruled that in case of property between June 2006 and March 2010, developers would not be allowed to pass on the burden to buyers.