The Telegraph
Since 1st March, 1999
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Easy on the home run
- Service tax breather to help apartment buyers

New Delhi, June 7: Call it Left pressure or builders’ clout, the good news is the government’s bite out of that dream flat you were eyeing has just loosened a little.

The government today announced it would allow abatement of up to 67 per cent in the value of a residential flat while calculating the service tax that was imposed on builders of residential complexes with more than 12 flats.

The value of land and legal expenses in acquiring the property would also not be taken into account in calculating service tax.

But before you pop any bottles of champagne to celebrate the good news, check out the fine print from your builder. Like most government rules, this has many loopholes which may allow your builder to charge you more by way of service tax than he should.

Parthasarthi Shome, adviser to the finance minister, said the government would now allow abatement of up to 67 per cent in the cost of a flat.

Senior revenue department officials explained that in a given flat, tax officials would allow land and legal costs to be taken out of the value and then deduct 67 per cent from the remaining cost, to arrive at the builder’s margin. The 10.2 per cent service tax would be imposed on this.

If a flat costs about Rs 10 lakh in Rajarhat, typically, Rs 5 lakh would be taken as land value of the flat and this would be totally deducted. If the builder has kept proper accounts of the remaining costs, which is Rs 5 lakh, and clearly shows his margin, service tax would be imposed on just the margin which could be as low as he is able to show.

Otherwise, the government will estimate his margin to be 33 per cent of the cost of building the flat (Rs 5 lakh in this case) and impose service tax on it. Thirty three per cent of Rs 5 lakh would work out to Rs 1.65 lakh. The service tax of 10.2 per cent on this would work out to be Rs 16,176.

J. Dasgupta, a property market analyst, said: “Most big builders will get away with even lower service tax as they will typically show that costs out of Rs 5 lakh are nearly Rs 4.25 lakh and their margin is a mere Rs 75,000. Service tax on this would be below Rs 10,000. This is less than 1 per cent of the total cost of the flat of Rs 10 lakh."

But there would not be any hard and fast rules in this game. Much would depend on land value shown before the tax department and the costs shown by the builders. The chance of arbitration would vary greatly and as Dasgupta said “for the lay buyer, things will remain quite cloudy”.

Revenue officials, too, were not clear on what land value could be shown ' market value or municipal rateable value or the value at which the property is being registered. Nor do they have any scheme or plan to ensure builders do not overcharge by claiming higher service tax from buyers than they pay the government.

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