Sucheta Dalal :What should a consumer pay—VAT or service tax on buying property?
Sucheta Dalal

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What should a consumer pay—VAT or service tax on buying property?  

March 30, 2010

The fight between the Central and State governments may lead to consumers being double-taxed for buying a piece of real estate. The Central government is trying to impose service tax—while the State government is trying to impose value-added tax (VAT).

The software industry which is facing the same problem has been protesting against this issue (of double taxation) for over a year, but has failed to receive any clarification from the government on the same. Now the realty industry is the victim of the same lacuna in the law, and the confusion in the industry is leading the consumers to pay double tax. Earlier, Moneylife has already reported on how developers are charging consumers both service tax and VAT. (see here).

“You cannot charge both service tax and VAT together. The government has to clearly define what is a real estate property (and whether it comes under the ambit of either VAT or service tax),” said Pranay Vakil, chairman, Knight Frank (India) Pvt Ltd.

“Sale of immovable property is governed by the Indian Stamp Act which falls under State jurisdiction. The Central government can’t encroach into State territory, and vice-versa, when all powers are exclusively provided for each government,” said Prem Chhatpar, a charted accountant.

“The government needs to define a real-estate property properly—whether it is a product or a service. Instead, it wants to impose VAT and service tax. At the end of the day, a common man has to pay this amount. He should be aware that he is being double-taxed,” said Pankaj Kapoor, founder, Liases Foras.

However, Mr Chhatpar said that real-estate consumers are neither supposed to pay service tax nor VAT. According to him, VAT is charged only on sale of goods. When a customer books a property, it is considered as buying of ‘immovable’ property and the buyer is not signing a construction contract with the builder. He is only contracting to buy a completed property. The developer is not rendering any service to the consumers, but only carrying out his duty.

“Unless the consumer is providing the construction material and asks the developer to construct a property, only then it can be regarded as a ‘service’. In such a case, the consumer can be charged service tax, not otherwise,” said Mr Chhatpar.

Some industry experts also questioned why both the Central and State governments are proposing to levy VAT or service tax for one year. “Why are we talking of VAT and service tax for one year, when by the next Union Budget, goods and services tax (GST) is likely to be levied,” said Mr Vakil.  

However, an industry expert is against the proposed GST regime. “If GST is levied, it will boost the realty market—but it will be actually a big boost for the government at the cost of the common man,” said Mr Chhatpar. — Pallabika Ganguly

-- Sucheta Dalal