Service Tax on Agreement to Sell: Understanding its Implications

Service tax is one of the most significant sources of revenue for the Indian government. It is levied on almost all services provided in the country, including those related to real estate. An agreement to sell is one such service that attracts service tax. In this article, we will take a closer look at this tax and its implications on an agreement to sell.

What is an Agreement to Sell?

An agreement to sell is a legal contract between a buyer and seller where the buyer agrees to buy a property at a predetermined price and the seller agrees to sell the property. The agreement typically contains various terms and conditions that both parties must adhere to. The agreement acts as a precursor to the actual sale deed, which is executed once all the terms and conditions of the agreement are met.

What is Service Tax?

Service tax is a tax levied by the government on services provided in the country. It is currently charged at a rate of 18% and is applicable to most services, including those related to real estate. The tax is collected by service providers and must be deposited with the government.

Implications of Service Tax on Agreement to Sell

An agreement to sell is considered a service as per the Finance Act, 1994. Therefore, it is subject to service tax. The tax is calculated on the total consideration payable for the property as per the agreement. The total consideration includes the sale price of the property as well as any additional charges such as maintenance charges, parking charges, and so on.

It is essential to note that service tax is only applicable to agreements to sell executed after 1st June 2015. For agreements executed before this date, no service tax is applicable. Furthermore, if the sale deed is executed within three years of the date of execution of the agreement, the service tax paid on the agreement can be claimed as input credit against the tax payable on the sale deed.

Conclusion

Service tax on an agreement to sell is an important tax that must be factored into the total cost of the property. It is crucial to ensure that the tax is calculated correctly and that all necessary paperwork is completed as per the government regulations. The implications of service tax on an agreement to sell can be complex, and it is advisable to seek professional advice before entering into an agreement. By understanding the tax and its implications, both buyers and sellers can avoid any legal and financial issues that may arise in the future.