Service Tax burden on Realty Sector in India

Service tax burden imposed by the Union Budget on realty transactions (Real Estate India) will affect the sector.
By: PropertiesHut.com
 
March 9, 2010 - PRLog -- The Union Budget 2010-11 is a big disappointment to the middle-class urban housing sector. However, it has bet on the economic growth to drive demand in the sector. By tweaking the income slab, finance minister Pranab Mukherjee has put some extra money into the pocket of middle-class tax payers. A person having an income of Rs 5 lakh per annum is likely to gain Rs 20,600 per annum from the provision. But, if his income is more than Rs 8 lakh, his annual gains will be around Rs 51,500. These are a big booster to the economy as they will increase the purchasing capacity of individuals. Ultimately, tax saving is equivalent to money earned.

Service tax on apartments - under construction

But at the same time, the finance minister has imposed service taxes on a number of services related to the real estate sector. Anshuman Magzine, MD of global consultancy firm CBRE Asia, says that these provisions will be a dampener and affect the revival of the real estate sector.

According to a budget provision, in cases where a property under construction is bought and a consumer makes payment over a period of time, then it will attract service tax. “In the ‘Construction of complex service’, it is being provided 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/promoter/developer to the prospective buyer and the service tax would be charged accordingly,” reads the provision.

This clearly means that if a house or apartment is sold before the completion of the construction, a buyer will have to pay the service tax. In fact, Sunil Mitra, revenue secretary, said that even if a house is already sold but the completion certificate could be secured from the concerned authority in 2010-11 or after March 31, 2010, the service tax would be levied on such transaction. According to tax experts, this will lead to a tax outgo of 3.4% of the sale value of the house. Mitra also confirmed that the department would allow an abatement of 67% on the value of house to calculate the service tax at the rate of 10.3%.

This means, if you have bought a house for Rs 50 lakh at the time of launch of a project, your tax liability would be Rs 1.70 lakh. However, with the service tax levied from service provider, a senior builder said they would pass on the liability to the customer. He said that since they have started launching affordable apartments, the margin is so thin that they would not be able to absorb them.

The budget has also included the renting of immovable property under the service tax net. Knight Frank says that this will have a negative impact on the real estate sector. The levy of service tax will impact rented commercial property with retrospective effect from June 1, 2007. Even in cases where a developer takes land on lease and pays lease rent, the lease rent will attract service tax.

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Page Updated Last on: Mar 12, 2010
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