Service Tax in Mumbai: A Comprehensive Guide for Businesses and Individuals

Mumbai's real estate market is a magnet for numerous investors and prospective homebuyers. Are you among those investors contemplating the purchase of a plot in Mumbai soon? If yes, then you are in luck because this guide is tailored just for you. Since real estate investment is one of life's most significant financial commitments, it demands meticulous attention and care.

Today, we are going to learn everything about service tax in Mumbai levied on real estate that can help businesses and individuals navigate the intricacies of property transactions in this bustling metropolis:

The Central Government's Service Tax on Construction Services

The Central government imposes Service Tax on the construction services provided by developers to property buyers, and the current Service Tax rate in India stands at 15 percent. Let us know more about it:

Calculation of Service Tax

When you pay for a property, the total cost includes both the land and construction costs. Service Tax is specifically applied to the construction portion of this cost. Previously, calculating Service Tax could be intricate, with the government employing "two rates of abatement for services of construction of complex, building, civil structure, or a part thereof." For residential units with a carpet area of less than 2,000 square feet and a value below Rs 1 crore, a 75 percent abatement was applicable, while for other units, it was 70 percent. These rates were subject to certain conditions.

Standardised Abatement Rate

However, from April 1, 2016, the government (via an amendment to notification No. 26/2012-ST) standardized the abatement "for services of construction of complex, building, civil structure, or a part thereof, subject to fulfilment of the existing conditions" at a consistent 70 percent. This adjustment results in an effective Service Tax rate of 4.5 percent on residential properties.

Additional Charges under Service Tax

In the case of other cost components like Preferred Location Charges (PLC), Floor Rise Charges (FRC), initial maintenance charges, and clubhouses, Service Tax is levied on the entire amount, with a standard rate of 15 percent. External development charges, infrastructure development charges (EDC/IDC), and lease rent paid to the state government are exceptions and are not included in the Service Tax liability. Additionally, parking charges are exempt from Service Tax.

Exemption for Resale Property Purchases

Service Tax is only applicable when purchasing property directly from developers and is not required in the case of resale property purchases, as no service is provided in such transactions.

GST Exemptions

GST (Goods and Services Tax) continues to provide exemptions for certain services, including those related to pure labour contracts for construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of civil structures or original works linked to beneficiary-led individual house construction or enhancement under initiatives like the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY).

Exemptions for Single Residential Units and Affordable Housing

Service tax in Mumbai or any other city in India does not apply to the construction of a single residential unit. This includes an independent house, villa, or bungalow. Moreover, there is no service tax on affordable housing as well. So, this makes it inapplicable to housing units with a carpet area of up to 60 square meters per house.

Determining Service Tax for Property Related to Construction

During the property acquisition process, the buyer disburses the following payments to the builder:

•       The assessed value of the land.
•       The charges for the construction service offered by the builder or developer.
•       Any fees for contractors, if applicable.

Who bears the responsibility for settling these taxes?

While it falls upon the developer to remit the VAT and service tax to the government, they commonly pass on these expenses to the buyers. The exact outcome hinges on the terms stipulated in the agreement between the builder and the purchaser. If your goal is to circumvent VAT and service tax payments, it's crucial to ensure that such an arrangement is explicitly outlined in your agreement with the builder.

Conclusion

In conclusion, understanding the nuances of Service Tax on real estate in Mumbai is pivotal for both developers and property buyers. As Mumbai continues to be a vibrant hub for real estate activity, staying informed about taxation matters is crucial for making informed decisions in property transactions. By staying abreast of the latest regulations and exemptions, individuals and businesses can navigate the complex landscape of service tax in Mumbai with confidence, ensuring that their investments are financially sound and compliant with the law.