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Service tax on sale of new houses to go
January, 31st 2009

Finally some good news for buyers of residential property as well as the slacking real estate mart. The Central Board of Excise and
Customs (CBEC) has done away with service tax on sale of new residential units. A notification to this effect has been issued by CBEC on Thursday.

This means that a house priced at Rs 10 lakh, which used to attract Rs 20,000 as service tax based on a construction value of Rs 6 lakh, will now be saved.

According to realtor Vijay Shah, the abolition of service tax combined with falling home loan interest rates will infuse some demand in the slacking realty market.

It was with effect from June 1, 2005, that the Central government had decided to levy service tax at the rate of 3.5% on the construction cost of new residential units.

Based on the earlier interpretation, CBSE was treating any residential scheme with more than 12 units as a residential complex liable for service tax payment as it considered the sale as a service rendered by the developer or promoter to the buyer.

Following various litigations and controversies, members of CBEC board have now clarified that the agreement to sell' between the developer and buyer cannot be termed as services rendered and hence would not attract service tax.

The notification states: The initial agreement between the promotersbuildersdevelopers and the ultimate owner is in the nature of agreement to sell'. Such a case as per provisions of the Transfer of Property Act does not create any interest in or charge on such property. The property remains under the ownership of the seller (in this case developer).
It is only after completion of the construction and full payment of the agreed sum that a sale deed is executed and the ownership of the property gets transferred to the ultimate owner. Therefore any service provided by such seller in connection with construction of a residential complex till execution of such sale deed would be considered as self-service and would not attract service tax, the notification adds.

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