Service Tax for Constructing a House: Guidelines and Calculations

When considering the construction of a house, it is essential to understand the service tax implications, especially if you are engaging a builder or building complex through contractual means. This article will guide you through the various scenarios under which service tax may apply and how to calculate the tax based on the size and sale price of the property.

Understanding Service Tax in House Construction

In the case of constructing a house on your own or by engaging labor, the event is generally considered non-taxable unless it falls under certain defined categories. Building contracts, unless they pertain to large-scale developments like townships or residential complexes, are often not subject to service tax.

Service Tax on Under Construction Property

Service tax is levied on services provided by builders, real estate developers, or any other person involved in the construction of building complexes, civil structures, or parts thereof, when these structures are offered for sale, and payment is received before the issuance of a completion certificate by a competent authority.

Declared Services

The service tax is applicable if the construction of a building complex, civil structure, or part thereof is considered a Declared Service as per the definition in Clause 44 of Section 65B of the appropriate tax act. The government has specifically listed certain activities as Declared Services, including the construction of building complexes and civil structures.

Exemptions from Service Tax on Under Construction Property

There are certain circumstances where service tax exemptions are available:

Construction of a Single Residential Unit

If the construction is of a single residential unit, designed for a single family, the service tax exemption applies.

However, if the house or complex has multiple floors or units, and each unit can be independently transferred in land or municipal records, each floor/unit would be considered a separate single residential unit. In this case, service tax on construction would be levied on each unit.

Construction of Low-Cost Houses

If the construction is of low-cost houses with a carpet area up to 60 square meters each, and these are part of a housing project approved by the competent authority under the "Scheme of Affordable Housing in Partnership" by the Ministry of Housing and Urban Poverty Alleviation of the Government of India, no service tax is levied.

Calculating Service Tax

The service tax rate differs based on specific conditions:

If the flat size is over 2000 sq ft (carpet area) - 70% taxable, 30% tax-free. Service tax would be payable at 4.5% of the total service amount. If the sale price of the flat is over Rs 1 crore - 70% taxable, 30% tax-free. Service tax would be payable at 4.5% of the total service amount. In all other cases, except those specifically exempted - 75% taxable, 25% tax-free. Service tax would be payable at 3.75% of the total service amount.

Conditions to Avail Abatement

To avail the abatement on service tax, the condition of having not availed cenvat credit on inputs used for providing the service must be met.

Conclusion

Proper understanding of service tax regulations is crucial when constructing a house to avoid unnecessary legal and financial complications. By adhering to the defined categories and conditions for exemptions, you can effectively manage the service tax on your construction project.