1) Service tax is applicable to property that is still under construction, where construction is not complete and the builder has not received an occupancy or completion certificate. 2) The service tax is levied on the builder, who is responsible for collecting it from the buyer as part of the property purchase price. 3) There is no service tax applicable on resale properties, as these would have already received completion certificates at the time of their initial sale.

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Introduction
In 2004-05, the Central Government introduced Service Tax on residential complexes, under Section
65(105) of the Finance Act 1994, which came into effect from June 16, 2005. The Budget 2010-11
suggested 10 per cent service tax on construction. As per the budget, service tax will be charged on only
those residential projects which are still under construction. The Finance Minister offered partial roll
back of the service tax imposed by the budget on the real estate sector. He rolled back Service Tax to 25
per cent from 33 per cent when the house discussed and passed the finance bill.
Service Tax Applicability
Circular No. 108 dated 29.01.2009 clarifies the applicability of service tax in cases where
developer/builder/promoter enters into an agreement with the ultimate owner for selling a dwelling
unit in a residential complex at any stage of construction (or even prior to that) and who makes
construction linked payment.
The Circular states that the initial agreement between the promoters/builders/developers and the
ultimate owner is in the nature of 'agreement to sell'. Such a case as per the provisions of the Transfer
of Property Act does not by itself create any interest in or charge on such property. The property
remains under the ownership of the seller (in the instant case, the promoters/builders/developers).
After the completion of the construction and full payment of the agreed sum, a sale deed is executed
and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any
service provided by such seller in connection with the construction of residential complex till the
execution of such sale deed would be in the nature of 'self-service' and consequently would not attract
service tax.
Further clarification in the Circular states that if the ultimate owner enters into a contract for
construction of a residential complex with a promoter/builder/developer who himself provides services
of design, planning and construction and after such construction the ultimate owner receives such
property for his personal use, then such activity would not be subjected to service tax, because this case
would fall into exclusion provided in the definition of residential complex as the definition of residential
complex includes a building or buildings having more than 12 residential units.
However, it should be noted here that in both the above situations, if services of any person like
contractor, designer or a similar service provider are received then such a person would be liable to pay
service tax.

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Property under Construction
Service tax would be levied only on a property under construction. A property is considered "under
construction" till the builder receives a "completion certificate" from the relevant authorities. If the
entire amount for the property purchase is paid after the receipt of a completion certificate, there
would be no levy of the service tax. The obligation of paying service tax is on the builder.
It is the duty of the builder to collect this service tax from the purchaser and deposit it with the
department. This provision is applicable from 1st April, 2010. For the purpose of issuing "completion
certificate" by "competent authority" it has been clarified by Notification No.1/2010 that for the
purposes of sub-clauses (zzq) and (zzzh) of clause (105) of Section 65 of the Finance Act, the expression
'authority competent' includes, besides any Government authority;
1. Architect registered with the Council of Architecture constituted under the Architects Act,
1972(20 of 1972); or
2. Chartered engineer registered with the Institution of Engineers (India); or
3. Licensed surveyor of the respective local body of the city or town or village or development or
planning authority;
Authorized under any law for the time being in force, to issue a completion certificate in respect of
residential or commercial or industrial complex, as a precondition for its occupation.
The following major changes have been made by the Finance Act 2010 for under-construction property:
1. An Explanation is added to section 65(105)(zzq) and (zzzh) which deems construction of a new
building and complex intended for sale, wholly or partly, by a builder to a person before, during
or after grant of completion certificate by the competent authority to be services provided by
the builder to the buyer/prospective buyer except in situations where entire amount is paid by
the buyer only after the receipt of completion certificate.
2. Insertion of Explanation will be applicable to the cases wherein the construction activity has yet
not commenced, going on or having been completed but completion certificate not received
and the buyer makes payment to the builder. It will not affect the transactions wherein the
payments have been made before 1-7-2010.
3. Service Tax exemption is provided to construction done under the Jawaharlal Nehru National
Urban Renewal Mission and Rajiv Awaas Yojana by Notification No. 28/2010 dated 22nd June
2010.
4. Insertion of new clause zzzzu in Section 65(105) i.e. levying of Service Tax (ST) on the amount
collected towards preferential location or internal/external development, such as, services
provided by a builder to a buyer in providing preferential location or external or internal
development of complexes on extra charges.
5. Deletion of the word "service" from title of Section 65(25b) and deletion of the word "service"
from clause 65(105)(zzq) i.e. definition of commercial or industrial construction.

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No Service Tax on resale properties
Service Tax is applicable only on property under construction or where a completed building has not
received its occupation certificate. As resale properties would essentially have obtained a completion
certificate, this tax would not be applicable to resale properties. Service Tax would not be levied on
parking lots. Many builders also sell parking space. It has been categorically mentioned in the budget
that any amount paid for getting a parking slot allotted would not be subject to service tax.
Abatement allowed
Budget 2010 brought Abatement Scheme, under Notification No. 1/2006 dated March 1, 2006, which
provides that the contractor is entitled to claim abatement to the extent of 67 per cent of the value of
services rendered by him. Hence, the net effect of the tax could be lesser than the 3.4 per cent, since
construction attracts service tax only on 33 per cent of the value. In the 2010-11 budget, the Finance
Minister rolled back service tax to 25 per cent of the value.
Service Tax on Preferential Location Services
The service tax has been levied on any amount spent by the builder for the development of the complex
like building internal roads, paving the garden, etc. Service tax of 10.3 per cent has also been levied on
any payment made by a buyer to the builder for getting a preferential location for his house/flat.
1. Any floor rise amount paid for getting an apartment on a higher floor.
2. Any amount paid to get an apartment/house with a specific number.
3. Any amount paid to get an apartment/house facing a specific amenity, say a swimming pool,
lake, park, sea, etc.
4. Any amount paid to get an apartment /house facing a specific direction (maybe as per vastu).
Impact of Application of Service Tax on Buyers
The issue of the imposition of Service Tax on construction and sale of residential property was a matter
of concern for the real estate and construction industry as well as buyers of residential property. As the
service tax was passed on to buyers, the sale price which was already high was further increased by
more than three to four per cent. Legally too, it was felt that where a buyer makes construction-linked
payment after entering into agreement to sell, the nature of transaction is not a service but that of a
sale.
Source: National Housing Bank

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