Buyers cheer as service tax on property goes on short break

Home buyers and property developers can enjoy exemption from service tax, though temporarily.

The Union finance ministry has sought legal opinion as to whether it can allow another government or outside agency (apart from the local civic body) to issue a completion certificate. A building completion certificate from the local authority is a must if a buyer wants exemption from service tax.

The ministry has sought legal opinion as local authorities in some states do not issue completion certificates, whereas some such as Maharashtra take many years to issue one.

In Mumbai, there are very few buildings that have got a completion certificate mostly because of the delay. In many cases, the certificate is elusive because the developer uses extra floor space or has not paid the dues to the civic body.

Civic officials and developers say the Brihanmumbai Municipal Corporation stresses on issuing an occupation certificate as proof of the completion of the building. Therefore, the government is thinking of allowing some independent authorities, such as architects or builders’ associations, as a sufficient proof of completion. So, it will be some time before a notification will be issued to decide as to when the service tax can be levied.

The Union budget for 2010-11 has proposed to expand the scope of construction service to impose service tax on houses that are still being built. The tax will be levied only on 33% of the base price of a flat sold at the construction stage. The effective service tax rate will work out to 3.3%, or 10% of 33%. Charges, such as development fee, parking fee and premium location, usually paid at the time of completion of construction, will also be included in the base price.

The new rule was to come into effect after the parliament approved the budget.

Service tax will be levied only if payment is made before the completion of construction. The sale of fully completed houses will be exempted from the tax if a completion certificate from a local authority is provided.

Property developers had a mixed response to the proposal. While some said the flexibility could be abused, others pointed out that the outsourcing to an independent accredited body would see less corruption.

Sunil Mantri, president of the Maharashtra Chamber of Housing Industry, said: “While the civic body does not insist on a completion certificate in Mumbai, it could create confusion in gram panchayats and other municipal corporations where there is no concept of occupancy certificate.

“That apart, we are opposed to the levy of service tax. Sale of flats is already covered under the Maharashtra Flat Ownership Act. Where is the service component in this? We have decided to challenge this levy and would soon be moving the Bombay high court on the issue.”