Disparity on service tax applicability will baffle home buyers and developers nationwide
The applicability of the Service Tax Notification effective on Indian real estate on and from July 1, 2010 to make home prices climb by 2-3 % approximately
Preference laid by the government to the secondary market of completed projects against under construction projects will impact funding cycles and capacity of the developers drastically thereby decelerating growth
India, July 1, 2010: In the context of India’s phenomenal housing shortage to the tune of 25 million units approximately the, imposition of service tax on under-construction projects effective on and from July 1, 2010 can be clearly perceived as a retrograde step by the Government as it contradicts its declared policy on development of housing in the country which emphasizes upon reduction of transaction costs on the sale of immovable property. With the enactment of the provision, housing will come dearer in both the cases of pre-bookings in under-construction properties as well as purchase of finished apartments. While for under-construction properties home buyers will now have to pay a service tax at the rate of 10.3%, incase of finished projects the pricing is expectedly higher on account of the appreciation.
Also, if demand for completed projects goes up, it will drastically stagger the funding cycles of projects thereby reducing capacity of the developers to develop multiple projects. This will adversely impact the growth of the industry, analyzing the fact that the service tax imposition on under construction projects will create preference to the secondary market of completed projects.
The applicability of Service Tax on under construction real estate projects, especially in the residential space will escalate project cost and in turn impact affordability of the consumers significantly when the net per unit price shoots up by 2 – 3 % approximately. An estimation done by CREDAI on percentage of service tax payable by a certain purchaser on an under-construction property worth Rs. 30 lakhs shows that the purchaser has to pay service tax on 25% of the installment at 10.3% approx which comes to around 2.6%.
Adding to the severity is the issue of discrepancy rising out of the applicability of the service tax itself on real estate industry. Mr. Santosh Rungta, President, Credai comments, “The construction of property and transaction of the same now considered as a service is utterly confusing. On one hand, when the Government emphasize upon development of housing in the country through its National Habitat Policy urging all the State Governments to reduce the stamp duty and bring it down to 2% – 3% in order to make home buying affordable, imposition of service tax is just the contrary step to impact on same affordability factor of the end consumers.”
Following are few observations from CREDAI which have a potential in creating confusion on the enactment of service tax provision.
The sale of immovable property is governed by the transfer of property act and should not have been under the ambit of services which now being implement will create utmost chaos and confusion resulting out of double taxation in the form of payable Stamp Duty on the transfer or sale of apartments. It is alarming to know that service tax coupled with stamp duty charges, VAT, central excise, service tax on contractors and consultants, municipal taxes sanction fees & development charges, drainage and water charges etc will further escalate purchase price and lead to higher construction cost affecting developers and the buyers nationwide. CREDAI estimates about 21- 27% of the costs is attributable to various taxes and duties and development charges imposed by the department and authorities.
The applicability of the service tax has also been linked to the issuance of completion certificates. The provisions and methodology for issuance of completion certificates vary across states and different practices are prevalent in terms of norms to be followed, compliances to be undertaken, legal formalities, timing of issuance, etc. Linking Service Tax liability with issuance of completion certificate would thus also pose practical difficulties. Besides, confusion will also emerge on the date of enactment of the provision (‘cut-off date’) due to difference of timing between construction activity, date of payment and date of agreement.
Mr. Kumar Gera, Chairman CREDAI comments, “Credai has already made multiple representations to the Finance Ministry in order to exempt housing sector from applicability of Service Tax. The Central Ministry being rigid upon the issue of imposing service tax on real estate, we feel that it has failed to adequately support this sector and hampered its efforts to make home buying affordable to the end consumers. However housing being a priority sector, we are still optimistic that the government will consider rolling back the provision in the interest of those millions of people of our country who are planning to own a home.”
It is the apex body of the organized real estate developers/builders across India, representing pan-India associations of real estate and housing developers. Since its inception in the year 1999, the association has grown manifold with allegiance from 20 state/city level associations viz. Andhra Pradesh, Chhattisgarh, Delhi-NCR, Goa, Gujarat, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal with over 5000 individual member developers encompassing over 60% of the organized private sector real estate development activity in member states/cities in the country. CREDAI has been instrumental in rallying the cause of the Real Estate sector by presenting the issues and concerns of real estate developers to the Government. For more information log on to – www.credai.org