Confused about all the taxes that you will have to pay as a first-time home buyer? PARESH KARIA gives you the lowdown on the entire gamut of direct and indirect taxes related to buying a home in Maharashtra and makes a case for a single window taxation system

The real estate industry is one of the most heavily taxed industries in the country. The taxes, both, those paid directly by the home buyer while buying a property, as well as those paid by the developer during construction, constitute nearly 35 to 45 per cent of the cost of the property. Let us examine the various taxes a property buyer has to pay while buying a property.

In order to give legal status to the property purchase transaction, one has to pay stamp duty on the sale agreement. Under Section 3 of The Indian Stamp Act, stamp duty is payable on instruments by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. The instruments (sale agreement) which are not properly stamped, are not admissible as evidence in court of law.

Generally, stamp duty is to be paid on or before the date of registration of the agreement. Delay in payment of stamp duty would attract a penalty of two per cent per month, subject to the maximum of 200 per cent of the proper stamp duty amount. In Maharashtra, stamp duty is payable at five per cent on the agreement value or the stamp duty ready reckoner rate, whichever is higher.

Under Section 41(1) of the Maharashtra Ownership Flats Act, 1963, the agreement with respect to flats to be sold by the owner/promoter/developer to the flat purchaser requires, compulsorily, to be registered under the Registration Act. If not registered, it cannot be produced as evidence in a court of law. The registration fee varies from state to state and in Maharashtra, it is one per cent of the agreement value but subject to a maximum limit of Rs 30,000.

Some states also levy VAT on under-construction property. Currently, in Maharashtra, VAT at one per cent of the agreement value is payable at the time of registration of the sale agreement. However, VAT is not payable in case of purchase of a property from the developer, after the construction is completed and completion certificate is received. There has been a lot of criticism and controversies regarding the decision of the state government to levy VAT on under-construction property. The main argument against the levy of VAT is that if the construction of property cannot be considered as goods (on which VAT is payable) and stamp duty is already payable on property transactions, then why VAT.

Service tax is another controversial tax levied by the central government on under construction property. The current rate of service tax is 12 per cent. Education cess and secondary and higher education cess is calculated on top of the service tax rate, which takes the effective service tax rate to 12.36 per cent. Service tax is payable only on the construction component and not on the value of the land. Since in most cases, it is difficult to ascertain the cost of land and construction cost separately, the government has come up with the abatement scheme. Under this, abatement (relief) is given for 75 per cent of the value of the property, and service tax is levied only on the balance 25 per cent. This effectively brings the service tax rate down to 3.09 per cent. However, this abatement is not available in case of preferred location charges, floor rise charges, internal and external development charge (like infrastructure development charges), club house charge, etc., in which case service tax at flat rate 12.36 per cent is payable.

It is to be noted that in the union budget 2013, it was proposed to reduce this abatement from 75 to 70 per cent, in case of flats having a carpet area of more than 2,000 sq ft or where the property value is Rs one crore or above. Hence, in such cases, service tax of 3.71 per cent would be levied. Like VAT, service tax is not payable, in case the property is purchased from the developer after the construction is completed and the completion certificate is received. A home buyer has to pay nearly 10 per cent of the value of the property, as taxes to the government. There are also indirect taxes, like excise, VAT, service tax, etc. Though, these taxes are paid by the developer, they are eventually passed on to the buyer. There is a dire need to rationalise the taxes, particularly on the purchase of residential properties, to make housing more affordable.


Source: Times Property, 18th May 2013.

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