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Service Tax on Redevelopment Agreement: All You Need to Know

Redevelopment of properties has become quite common in recent times due to the deteriorating condition of ageing buildings and the need for modernization. However, with every construction or redevelopment project, comes the responsibility of paying various taxes, including service tax.

In this article, we will discuss everything you need to know about service tax on redevelopment agreements.

What is Service Tax?

Service tax is a tax levied by the government on the services provided by a service provider to its customers. It is charged on the value of the services rendered and is collected by the service provider from the customer on behalf of the government.

What is a Redevelopment Agreement?

A redevelopment agreement is a contract between the landowner/developer and the builder for the redevelopment of an old or dilapidated building. The agreement specifies the terms and conditions of the redevelopment project, including the rights and obligations of both parties.

Service Tax on Redevelopment Agreement

According to the Finance Act, 1994, service tax is applicable on the construction of residential and commercial properties. Therefore, any service provided in relation to the construction or redevelopment of a property is subject to service tax.

In the case of a redevelopment agreement, the developer or builder is providing a service to the landowner in exchange for the right to construct or redevelop the property. Hence, service tax is applicable on the consideration paid by the developer to the landowner.

However, there are certain exemptions available under service tax for the construction or redevelopment of residential properties, provided certain conditions are met. For example, if the property is constructed for personal use and not for commercial purposes, and if the carpet area of the residential unit is less than 60 square meters, then no service tax is applicable.

Similarly, if the property is constructed under a government scheme such as the Pradhan Mantri Awas Yojana (PMAY), then no service tax is applicable.

In Conclusion

Service tax on redevelopment agreements can be a complex issue and depends on various factors such as the type of property, the purpose of construction or redevelopment, and the terms of the agreement. Therefore, it is always advisable to seek professional advice to understand the tax implications and comply with the regulations.