The Urban Development Minister, Mr Jaipal Reddy, will soon take up with the Finance Ministry, the contentious issue of service tax imposition in the real estate sector proposed in the Budget. This assumes significance as the service tax imposition can translate into a three-four per cent increase in the cost of under-construction apartments for most home buyers.
“The industry is not in the pink of health…My ministry feels the proposal for service tax needs to be reviewed. I will recommend a review of the proposal to the Finance Ministry in the next few days,” Mr Reddy said on the sidelines of an Aoocham conference.
The Union Budget had proposed that unless the entire consideration for the property is paid after the completion of construction (that is after receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service, provided by the builder or developer to the prospective buyer; service tax would be charged accordingly. This is slated to come into effect from a date to be notified after enactment of the Finance Bill, 2010.
The tax works out to about three-four per cent of the total cost of the apartment, as it is applicable only on the value of services. So roughly, if a buyer books a flat of Rs 20 lakh, he will be required to fork out an additional Rs 60,000-80,000 on account of the service tax component.
Also there is no clarity on some critical issues — whether the imposition is with retrospective effect and what the additional outgo would be in case the home buyer has already paid a substantial portion of the overall amount.
“This is not the right time (for imposing service tax). If it is not rolled back, costs would go up. The demand is still restricted and the sector continues to need support,” said DLF Chairman, Mr K. P. Singh.
Real estate associations such as the Confederation of Real Estate Developers’ Associations of India (Credai) have vehemently opposed the proposed service tax imposition, saying it will ultimately make buying houses more difficult. Credai has stated that such a move would lead to double taxation (as all States require buyers to pay Stamp Duty on the transfer or sale of apartments). Imposing a new tax is contrary to the declared policy of reducing the transaction costs on the sale of immovable property, it has said.
“We have already met Finance Ministry officials and we are asking for a roll back,” Credai Chairman, Mr Kumar Gera, told Business Line.
Interest rate concerns
Asked about the recent RBI move to raise key policy rates (repo and reverse repo) by 25 basis points, Mr K. P. Singh said the move was on expected lines, but he expressed the hope that there would be no further tightening.
“I had expected it to happen. It was designed to ensure that the real estate market does not overheat. But if there is any further tweaking, the market will get disturbed and prices will go up,” he said.