Service tax on under construction property in Bengaluru

Hi!
Before getting on to my question, let me walk you through the email interactions I had with my builder with regard to service tax & VAT calculations which will give you a clear idea as to what I am really bothered about.
 
With regard to a query on service tax & VAT on under construction property to my builder, he sent the below calculation,
1. Calculation of ST = Construction Value ( CV is part of your Allotment letter & Agreement booklet ) X 40% x 15%  . For example if Construction Value is Rs.1 lakh then ST will be 1,00,000 X 40% X 15% = Rs.6,000/-

2. Calculation for VAT = Construction Value ( CV is part of your Allotment letter & Agreement booklet ) X 70% x 14.5%  .

For example if Construction Value is Rs.1 lakh then VAT will be 1,00,000 X 70% X 14,5% = Rs.10,150/-.

Since I had major doubts about the calculation, I further raised the below four questions as follows,

"1. Since it is clear from your explanation that you are taxing only on the construction component excluding the land value, I suppose you know that the construction cost needs to be divided into two heads, material cost & labour service cost & then taxed accordingly. Service tax is levied only on the labour & service cost & VAT is levied only on the material cost. According to your calculation, I find that you are taxing ST on 40% of the construction cost which needlessly says that it must be your labour service cost. So the other 60% must inevitably be the material cost upon which you can levy VAT. But I find you considering 70% of the construction cost for VAT instead of 60% which is a dire miscalculation. Kindly clarify on the same.

2. When the above mentioned taxing methodology is used where ST & VAT are not levied on the gross agreement value, you would need to furnish the costs associated with labour service & materials used. So that we would find it transparent & comfortable to pay the same. If you aren't comfortable in furnishing the same, you must resort to taxing on the gross agreement value.

3. I am still really not able to understand why you guys aren't using the simple methodology of taxing on the gross agreement value which I believe is more beneficial to your customers than the present one you are using, as government gives an abatement of 75% on service tax & VAT being 5.5% in Karnataka, the overall tax would have just been 570355/- in our case.

4. Since you are collecting good lot of taxes from our side, I believe it becomes your responsibility to share the tax invoices for the amount deposited with the government"

The builder then promptly responded with the following clarifications, if they could be called so. Find them below,

"1. We wish to inform you that the bifurcation of 40% towards ST and 70% towards are payable to two difference authorities i,e Central Govt and State Govt respectively and hence the bifurcation calculation are provided to us by these authorities themselves, also note that it need not add up to 100%, as it is not going to same entity. Hence, our calculation is correct.

2. Bifurcation of each head is usually not given in any of such transactions or any other products, since it’s the internal data of any organization.

3. Composite method of calculation is followed by few organizations, however there the percentage changes and hence outgoing in both the cases is same, since govt will not collect lesser taxes from few developers and higher from others. Calculation methodology chosen is decided by our Audit team and same is in operation from the time ST & VAT are applicable for real estate industry

4. We have been issuing Tax cum invoice towards all the payment with our PAN number CIN etc, however there is no methodology from govt to provide such details for individual clients, if it comes into effect , same will be made available to client. As an organization, our payment is coming from the instalment towards your apartment and that is what belongs to us, however taxes are paid to govt and necessary checks are done by Govt at regular interval."

Kindly enlighten me on the following,
Is the above explanation given by the builder is right or is there is anything I need to worry about?
Is he right in saying that the quoted ST & VAT percentages are specified by the govt authorities? 
Isn't he required to furnish the construction cost heads to customers?
Asked 6 months ago in Service Tax from Bengaluru, Karnataka
Dae Sir,

Explanation given by the builder seems to be correct to me.

Thanks and Regards,
CA Abhishek Dugar
Abhishek Dugar
CA, Mumbai
766 Answers
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  Talk to Abhishek Dugar
Dear Sir,

As per the information provided you, VAT is a state specific act. So i will not be in a position to comment upon it but as far as Service Tax is concerned he obviously will not give you the break up of his costing as that is his privileged and confidential documents but he has to issue you an invoice demanding the Service tax Payable.

There is no way in which you can verify that is he correctly paying those taxes to the Government or not.

Trust this clarifies your query. 

Please feel free to call/ get back in case of any further clarifications. 

Thanking You. 

Regards,
Rohit R Sharma
BCOM, ACA, LLB-GEN, CERT. FAFP 
Rohit R Sharma
CA, Mumbai
719 Answers
5.0 on 5.0
  Talk to Rohit R Sharma
Dear Sir,

The government has a role to play with the rate of Tax but it is not mandatory for the client to disclose his working as to how has he derived the amount on which tax is charged.

He will at the most tell you the amount on which he is charging taxes but not the manner in which he has arrived the figure.

Trust this clarifies your query. 

Please feel free to call/ get back in case of any further clarifications. 

Thanking You. 

Regards,
Rohit R Sharma
BCOM, ACA, LLB-GEN, CERT. FAFP
Rohit R Sharma
CA, Mumbai
719 Answers
5.0 on 5.0
  Talk to Rohit R Sharma

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