Service Tax is Not Applicable on the Purchasing of under Construction Flats-Delhi High Court

The Delhi High Court recently held that no service tax could be charged in respect the contracts entered into with builders or developers for the purchase of apartments/flats. The court ordered if the developers have already collected the service tax on such services, same should be refunded with interest at the rate of 6%. However, the services tax on preferred location charge is still applicable. Till date, service tax is levied by the central government on the construction services offered by the buyers and developers. Service tax is applicable on almost all services that a consumer avails, including purchasing an under-construction property.

This is so because, in the case of an under-construction property, the builder or developer is deemed to be the provider of construction services to the home buyer, and hence service tax is charged on the cost of construction. This means the cost of land is excluded. For the purpose of calculation, 25% of the gross value of an under-construction unit with the value less than one crore is considered to be the cost of construction, and service tax is applied on this. Service tax is a tax on value addition and charges for preferential location is one sense embody the value of the satisfaction derived by a customer from certain additional attributes of property constructed.

Such duties cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex. Home buyers have always been burdened with various taxes. Instead of safeguarding the interests of home buyers across the country, the governments have made them an easy source of income by levying different taxes.

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