VAT and service tax swamp new home buyers

Mumbai builders are slapping new home buyers with a nasty surprise in the form of value-added tax and service tax. This means that buyers have to pay 12% more on taking possession of their contracted and fully-paid apartments

Property prices in Mumbai have already zoomed past their pre-2008 peak and have become inaccessible to most people, but the nasty surprises for buyers who had already booked and paid for their flats do not seem to end.

Moneylife learns that builders are demanding extra money under value-added tax (VAT) and service tax from homebuyers who had booked properties during the recent slump. The demand apparently comes up when a person goes to complete possession formalities, leaving investors high and dry, say aggrieved buyers. 

In fact, in case of service tax, there is no clear regulation passed by the government as of yet on whether the buyer has to pay the tax. This tax seems to be just another way for builders to extract more money than contracted, although some of the amount collected may be in the form of an undertaking to pay. However, for homebuyers who have borrowed heavily to pay for their properties, this additional 8%-10% cost differential is often difficult to cough up.

Importantly, developers do not mention these costs while booking the property— nor is it mentioned in the sale agreement. Consumers are asked to pay 4.5% VAT on the agreement value plus approximately 4% as service tax for buying a new property only while taking possession. Some consumers have had to give up their booked apartments because they could not arrange this additional financial demand.

“I had to cancel my deal as the developer asked me to pay 4.5% VAT on agreement value and also asked for a blank cheque with an undertaking for the service tax. It is very difficult to arrange such amounts just when you go to take the possession of the property,” said a buyer, who is a senior executive with a leading IT company.

Sources say that developers try to make this additional demand appear very justified and even pretend to help the customer. Some suggest putting the money into an escrow account or creating a fixed deposit to pay the tax amount in the future, if necessary. They are told that the deposit /escrow will be tapped only if the ongoing litigation on the VAT issue goes against them.

“The Maharashtra government is yet not clear on VAT. There will be clarity in a few weeks, so we are collecting the money and keeping it separately in an escrow account as it is very difficult to collect the amount from the consumers after the Act is enacted,” said Lalit Kumar Jain, chairman, Kumar Urban Development Ltd.

However, sources connected with the realty industry say that builders could just as well take an undertaking from each buyer that they (the builders) will pay VAT if the court rules against the builders. They further point out that litigation in India goes on for decades and there is no reason to collect money from customers today in anticipation of a judgement. Some point to a similar litigation in the 1990s over the stamp duty issue—at that time, builders merely collected undertakings from buyers and when the issue was decided, the state government offered an amnesty scheme permitting a reasonable stamp duty payment to ensure that buyers were not unduly harassed.

Sources also tell us that charging VAT from customers is a new development. Earlier, builders used to include VAT in the sale price. The demand for a blank cheque for service tax payment is another travesty. “As of now, developers are not supposed to charge service tax because it is still not mandated by statute. After it becomes a final Act, the government will notify the date from when it can be applicable and only then can you ask for service tax,” said Vimal Punmiya, chartered accountant and proprietor, Vimal Punmiya and Company (an audit firm). {break}

However, legal firms are not yet clear on the whole issue of VAT and service tax payment on property.

“The Supreme Court has ruled on this issue in the case of K Raheja Development Corporation versus the State of Karnataka [2005] 2 STT 178 (SC)] where the Karnataka Sales Tax Act, 1957, was held to be applicable to payments made towards construction activity taking place between the date of agreement and transfer of possession to the buyer. Subsequently the service tax authorities issued a clarificatory circular stating that service tax would be applicable to these ‘works contract’ arrangements. The validity of this circular is currently being questioned before the Bombay High Court. Meanwhile the 2010 Finance Bill has also introduced an explanation including such construction services within the definition of taxable construction services. This explanation will come into effect in a couple of months when the Bill is passed,” said Shreya Rao, lawyer, Nishith Desai Associates.

She also clarified, “Both service tax and VAT apply to ‘works contract’ arrangements such as construction contracts, which involve an inextricable element of both sale of goods and service. This is why an abatement is provided, both for VAT and service tax which are applied to works contracts at a lower rate than usual. If the purchase is of a completed property there should be no ‘works contract’ with the buyer, pursuant to the decision in Raheja. Therefore these taxes should not be applicable as VAT/service tax does not generally apply to sale of completed immovable property.”

However, an independent charted accountant, Prem Chhatpar, argues, “In 2008, while giving the judgement for Larsen & Toubro’s case under works contract, the Supreme Court doubted the law laid down in the Raheja case. The Court has decided to reconsider the principles in the Raheja case in front of the larger bench of the Court. The Court also hinted that examination has to be made in the context of definition of sale under the Sale of Goods Act and Transfer of Property Act.”
“In the L&T judgement, the court hinted that it is perverse to consider every case where the flat is booked under construction to be deemed to be under ‘works contract’,” added Mr Chhatpar.

The issue from the customer perspective is that he/she is suddenly being asked to pay more—an additional amount which was neither disclosed nor contracted earlier. As things stand now, for a purchaser acquiring a new property, he has to pay 5% stamp duty (for value over Rs5 lakh), 1% as registration fee, 4.5% as VAT and 3.5%-4% as service tax. This works out to14% over the property price which is extracted by the government on property prices, which are already astronomical.

The ground reality also is that a customer booking a flat 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.

Besides these taxes, the interest rates on home loans are also increasing gradually. A common man hunting for a roof over his head is now totally pinched with the sudden increase in property prices, taxes and interest rates.




6 years ago

i have purchase home at nalasopara buy builder demanding vat 3% & vat 1% by cash and after that he giving me sale agreement for loan purpose . i have paid already stamp duty & registration fees

another issue is builder demanding two years mentence s in advance

pls gide me what will be do in this case


6 years ago


lalji patel

6 years ago

i want to know howmuch percentage of vat on construction service in maharastra?
plz guide me

Dhiraj S Suvarna

6 years ago

Thank u very much for giving me information.


6 years ago

No one can charge any amount for any legislation to be / not to be passed in future. And Govt. should make them applicable on dates after it is gezetted.


6 years ago

i have booked a flat in mumbai on auguast 2009 but registration is not done yet some one tell me i have to pay vat or service tax


6 years ago

I have booked a flat in March 2010 and did the registration in march itself. Now, its ready for possession and the builder is asking a 5% VAT. Is 5% VAT a valid one, where i read in the newspapers as the vat to be charged at 1%. What should i do in this case, as i hardly have such a big money again to shell out

6 years ago

i just read in anothe rweb site stating that it would be 1% for the deals clossing after 1st April, would it be a correct information?


6 years ago

i have brought a flat under resale. My agreement is dated 21st of April, 2010.At the time of my agreement - my flat is 90% complete.
The original agreement of the seller was dated september 2009 with the builder , when he made a agreement with the builder the flat was 60% complete.
I want to know - the liability of service tax and vat that would be applicable tome.
Pls advise


7 years ago

Dear Sir,

I purchased a house which is still under construction and expect possession in 2011. I paid stamp duty and registered my Sale agreement in 2009, will I have to pay VAT and Service Tax.
Kindly advise.
Many Thanks

CA. Dhiraj Satra

7 years ago

The article seems very biased. The issue here discussed is the builders have started collecting vat and service tax by whatever name it may be called though it was not informed to the buyers of the property when they entered into the agreement for sale. However the main issue is both the state and the central Government wants to earn out of the real estate market and imposed vat and service tax without considering the constitutional validity of the tax levied.

The state Government has imposed 1% VAT on the agreement value of a flat. The sale price of flat includes cost of land which is an immovable property and the state government has not right to levy vat on immovable property which is not considered as goods as per the definition of goods.

The central government has also proposed service tax on the value of the agreement without considering the actual value of service being provided by a developer.

Since both the statutes the VAT Act and the Finance Act 1994 under which the service tax is proposed are different statutes implemented by different government, the rules framed by both the governments for valuation of the quantum of tax will be favouring its own revenue and will have independent of the valuation rules framed by the other government.
There are number of cases where both the governments are state to collect the taxes, state claiming it is liable to vat and the center claiming it is liable to service tax and resulting into unnecessary litigation and harrassment to the tax payers. One such example is taxation of Software, where the companies are charging both vat and service tax to their customers without going into litigation however the consumer has to suffer ultimately.

The main culprit here are the State and Central Governement, who have levied the unconstitutional taxes, whereas the builders or in that case any businessman is just an implementing and collecting and paying the taxes levied by the governments without any commission earned out of it.
Both State and Center should come forward and decide the issue whether the tax is to be chargeable by state or the Center and if by both then the common valuation rules or levies should be made applicable so that there is no scope left for litigation.
Warm regards
CA. Dhiraj Satra

A. Aftab Ahmed

7 years ago

Sir, Please tell me any Transporation seperate service tax percentage, i want to need the details.

A. Aftab Ahmed

7 years ago

Sir, Please tell me any Transporation seperate service tax percentage, i want to need the details.


7 years ago

I have gone through your article & in true sense is an eye opener, still needs practical yes or no answer from you regarding the following question that is making me sleepless now a days....
I have booked a flat on 16th march. It is under Construction Property & about 80 -90% work has been over & builder has agreed to give us possestion in July'2010. The sale agreement is made on 19th march 2010. I am going to mortgadge this property to the SBI for Home loan. My Question is Whether I will be asked / forced for 4% Service tax?
Awaiting a answer from your side....

navin kumar bhatia

7 years ago

I read your article on VAT & Service tax it was really mind blowing & a eye opener.
i have booked a shop in mumbai in a under construction project can you guide me whether i shall have to pay service tax & vat if i get the registration done before 31st march & if not what would be the percentage of vat & service tax applicable.
warm regards navin

Mis-selling of LIC policies continues

Agents are painting a rosy picture and promising guaranteed returns to clueless investors

Even as insurance behemoth Life Insurance Corporation of India (LIC) is busy bailing out initial public offerings of public sector units (PSUs), LIC agents are finding new ways to trick investors.

Meanwhile, the insurance regulator is busy issuing advertisements selling and explaining products such as unit-linked insurance plans (ULIPs) instead of cracking down on dubious selling tricks.

A source told Moneylife,”Two years back, a client was sold an LIC policy for which she made one-time premium payment of Rs1 lakh for 10 years. After the vesting period, she was promised a monthly pension of Rs5,000 (Rs60,000 annually) for the rest of her life. This sounded too good to be true. At this rate, the client’s entire notional corpus is likely to get eroded. From where will LIC fund this kind of money? It is hard to believe that the insurer would sell such a product. When we did the calculation, we found that the return being promised by the policy worked out to be 25% compounded annually. A debt-oriented product cannot offer a return of more than 6%-7%. Even equity-linked products can manage 15% returns at the most.”

Often, agents show a performance chart to the investor which is invented by themselves and not LIC. The performance chart shows impressive compounded annual growth rate (CAGR) returns of 20%-25% over a period of one year.
According to sources, agents don’t give the product literature to the investor during the 15 days of the ‘cooling-off period’ under some pretext. In this case too, the agent said that she was “busy with the financial year end” and would submit her product literature later. By the time the agent produces the documents, the investor has no option but to continue with the policy.

Numerous misleading advertisements of LIC are being circulated in regional languages carrying a logo of LIC, in smaller towns. These ads promise astronomical returns.

Apparently LIC is not responsible for publishing such misleading claims but it is the agent who takes investors for a ride. Usually the product literature is not on the letterhead of LIC.

“There are umpteen instances where clients are promised exaggerated returns. One of them was promised a return of 35%. This example is just the tip of the iceberg,” adds the source.

Earlier, LIC’s Money Plus—launched in 2007—was also rampantly mis-sold by distributing pamphlets promising unrealistic returns.

The reason for this mis-selling is the high commissions doled out to agents.



RP Sharma

7 years ago

Mis selling of life insurance products is due to lack of proper training to the advisers.The advisers blindly follow their D.O,s thinking that they are more experienced in this field, who used to quote exorbitantly high returns to attract people as they are only concerned with sales to close targets & not with the benefit of policy holders.It is therefore essential that every insurer make sure that proper training is provided to the advisers at branch level even after passing the exam conducted by IRDA


7 years ago

In LIC It theDevelopement officer who really get the benefit of work done by the advisers as It has been generally seen that while illustrating plas of LIC the DO is only concerned with the sale even if adviser,s 3-4 year commision may have to be returned.But these DO,s never compensate the advisers from the Bonus payment the get out of the work done by the advisers.This type of practice should be stopped and people should be educated to by insurance policies which are customer oriented& not those paying high payout to advisers.

Suresh Ramasubramanian

7 years ago

If as sumitra swain says, certain LIC officials are engaged in misselling LIC policies, Moneylife / the Moneylife Foundation is certainly the best organization to raise this and get some reforms implemented.

sumitra swain

7 years ago



7 years ago

it,s not first time when LIC agents do misselling, actualy not any traning provide by LIC 4 ULIP sell.according rull every agent con't' sell ULIP, B'cause it's complicated by nature. but LIC not obserb it,rest done by D.O's he given illustration on 30-40% in compoud ratio & not show mortality charge. LIC sell mostly it's in rural area.

m k sujithkumar

7 years ago

appoint educated people as agents as well as full time agents because lic agent people with educated background i feel never
missell as they listen to their conscience others are not
bothered as they have other lic income to fall back on if they don't get business

Chetan Bhatia

7 years ago

The Heading should be "Mis-selling of Insurance Policies continues"

Two recent Cases:

A bank has wrongly sold a policy, with a higher cost though a much lower load was available (in an other plan from the same co) without disclosingg the load factor to a Healthy male.

Secondly a previous policy was redemed with the sales talk that its no more lucrative. The proceeds were then invested in a new plan of the same ins co. in a regular premium which was sold as a single premium. Later on the company communicated that it shall be treated as a single premium only & no further payment shall be made. However in the process did not refund the 17% odd load charged instead of 2% applicable to a single premium plan. (I have the evidence)

What say???

Yogesh P K

7 years ago

Insurance is a tool to provide monetary protection. It can also be used to attain financial gains but it is not the best option. In India unfortunately even educated people have failed to understand this basic concept and thats why agents are able to cheat common people. LIC agents usually declares themselves as 'government insurance company' representative and take undue advantages of peoples faith by showing some unofficial statements impress and assure people with higher return. Mis-selling is a common practice in insurance sector whether its LIC or private insurance company. After all agents work for their commission and are paid only when they bring policies.

Suresh Ramasubramanian

7 years ago

Comments by the above Shambu Nath Sah and Arvind Bamankar both use some key phrases .. in fact they seem to be copy and paste copies of each other with one or two minor word changes, like two people working from a template.

"best organisation that gives legitimate investment return", "no question of misselling", "It is not bad as you think.You should think positive". ."Personal presentation has no meaning. You should apply your mind openly, then you should criticise the LIC."

etc etc.

I have heard these very boilerplate phrases in another context too .. among agents of various MLM programs who try to convince us to park our money in their programs.

Now I know that the LIC is certainly not a MLM program. But its policies are not to be seen as investment vehicles, or even sold as investment vehicles. They are insurance policies - which means when you pay your money to LIC, your family gets a certain insured amount if you die. Which could be 25 lakhs or whatever. Similarly you can pay a non life insurer Rs.5000 a year and then you are insured against illness that requires hospitalization, to the limit of say 5 lakh rupees. But you dont get a paisa of that 5000 back.

That's fine by me. In fact, life insurance can be on those lines too, with a higher annual premium but not as high as it currently is, both by being marketed as a very sub-par investment vehicle, and by hefty commisisons to agents, management expenses etc being chopped out of the premium.

Take as much LIC coverage as would meet your projected annual income for your life. Dont try to invest your hard earned money in it by putting in more policies than are necessary to ensure an adequate future for your wife and kids.

Beyond that .. there is PPF, equity mutual funds (both of which you can buy directly, without an agent!), land, gold .. a whole lot of things you can spend your money on than waste your hard earned cash helping agents buy laptops and get sent on foreign trips by LIC.

Suresh Ramasubramanian

7 years ago

@Manoj - not at all saying agents shouldnt get commissions. LIC needs people to market its policies so uses agents. Well and good.

Just saying that LIC should not take the commission out of the policyholder's premium. They are welcome to pay commissions, incentives, foreign trips etc out of their own pocket - from the crores they earn by parking this policy amount in the money and equity market.

None of my affair how much they pay to a agent. Just that if I want to buy a policy I should be able to buy it by myself without wasting my hard earned money on an agent and his commission.

arvind Bamankar

7 years ago

As it seems you are totally misguided by any individual agent. Above comments are completely baseless. LIC is the best organisation that gives legitimate investment return to their customers.There is no any question of misselling of LIC PLANS.Your mind set is totally against LIC. It is not bad as you think.You should think positive.Personal presentation has no meaning. You should apply your mind openly, then you should criticise the LIC.I am fully against your view. Comments are unethical indeed.


7 years ago

@ Suresh, Manish et al, I have one question for people like you who constantly criticise the commissions being paid to the agents. I presume you must be employed in some organisation. Tomorrow, if your organisation were to tell you that there would be no salary hike from now on, would you still continue to work there? Or worse still, if they say that based on your one year's performance, the company has not found any value addition in your work and therefore they are actully cutting your salary?? What will be your reaction?

Enough and more has been said about the commission paid out to the distributors of financial products. And most of these inane comments come from people who are employed as salaried individuals who somehow percieve the commission earned by these agents as easy money. Nothing could be farther from truth than this.

There are many products across many industries today which cost a bomb. Can we then petition these companies to cut the salary cost of the employees so that the benefit could be passed on to us, the end users? Sounds ridiculous. Right? Same is the case with insurance commissions too. An agent earns this commission. No one will come and give it to him freely.


7 years ago

@shambhu nath sah

You are wrong . LIC policies are long term products and they are pure debt products , this in itself violates basic principles like Equity should be used for long term , given that LIC policies or for that matter any other Insurance company policies (endowment) are15-20-25 yrs policies , You tell me is it not better to invest the money every month in those mutual funds for long term .. forget risk here because in long term equity pays off and there are statistical and historical proofs .

Other point is Liquidity and trap factor . You pay 50k per year in a LIC policy and after 3 yrs when you have paid 1.5 lacs and want your money back because of some reason , how much does one get not more than 30-35% .. even in that case you dont get first year premium .

So that means 30-40k . Now what kind of product is this ?

Insurance agents are the one who earn maximum with minimum effort .

Regarding the "Returns" .. Why dont you tell us what is long term returns from LIC products or any endowment products compared to PPF , Equity funds or Balanced funds , or just take debt oriented funds .

And one personal case is enough to disprove things , if its based on fact and figures .we dont need many .


Suresh Ramasubramanian

7 years ago

Never mind one particular agent. Whether the agent sells a good plan, or a useless one like money plus, he still ends up with a substantial commission that is taken out of the premium paid by the customer.

Now, whether it is a good investment vehicle or not, compare the typical LIC policy's returns to say the 15 year PPF. Or to various government bonds. Not even comparing these to equity mutual funds.

That is entirely besides the point though as the commission to the agent should absolutely not come out of the premium paid by the customer.

If LIC wants to incentivize an agent, they can pay him themselves. Or they can do what the mutual funds have done, abolish entry loads and let the agent work out any commission required with the customer directly.

And moreover, with mutual funds, you can buy your funds directly from the fund house. With LIC you are forced to go through an agent, there is no other sales channel that I can see.

So even if you are an informed investor and know what LIC policy to buy, you still have to shell out commission to an agent simply for buying the policy.

Food inflation slips to 16.22%

Even though prices of certain items like pulses and vegetables continue to rise, food inflation has eased a bit

Food inflation eased marginally to 16.22% for the week ended 13th March from 16.30% in the preceding week even though prices of certain items such as pulses and vegetables continued to rise, reports PTI.

While moong and pork became dearer by 5% each, urad prices shot up by 4%, vegetables by 2.63% and coffee by 2% during the week.

However, masoor prices slipped 4% and there was a fall of 1% each in the prices for eggs, bajra, maize, condiments and spices.

While food inflation is at a four-month low, overall inflation has been relentlessly rising and was at 9.89% in February, up from 8.56% in January.

The rise in overall inflation has been mainly attributed to high food inflation and the recent hike in fuel inflation after the increase in excise and customs duty on petrol and diesel.


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