Imposition of Service Tax in real estate to dampen growth of the
entire industry, feels CREDAI
· Imposing a new tax is contrary to the declared policy on development of housing in the country by reducing the transaction costs on the sale of immovable property
· CREDAI plans to meet the Hon’ble Finance Minister requesting him to roll back the proposed service tax imposed on the real estate sector
The most disappointing feature in this Budget for the realty sector is the levy of Service Tax both on renting of commercial property and on sale of under-construction housing units.
The provision:
According to the provision, unless the entire consideration for the property is paid after the completion of construction (i.e. 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 Service Tax would be charged accordingly.
How it can adversely impact the end consumers:
Effectively, this means all buyers would have to pay Service Tax for the purchase of any apartment and/or commercial units. The tax amount will come to about 3.5% of the cost of the apartment, which includes the value of land and also the cost of construction.
CREDAI sees two serious flaws in this provision. First, the sale of apartment/commercial spaces is a sale of immovable property and is governed by the “Transfer of Property Act”. It cannot, therefore, also be a service attracting service tax. Second, all states require buyers to pay Stamp Duty on the transfer or sale of apartments and commercial spaces and this ranges from 5-9% across the country. The payment of Stamp Duty and Service Tax on the same property constitutes a clear case of double taxation. Moreover, the National Habitat Policy governs the policy of development of housing in the country, which urges all the State Governments to reduce the Stamp Duty and bring it down to 2%-3%. Imposing a new tax is contrary to the declared policy of reducing the transaction costs on the sale of immovable property. CREDAI therefore, strongly opposes the levy of Service Tax on the sale of apartments, home or commercial space.
Mr. Kumar Gera, Chairman, CREDAI, commented, “I would say this budget by and large is a one in which ‘status-quo’ is being maintained for the real estate sector. The issue of applicability of service tax to all under construction flats and homes being booked prior to completion will increase the end cost and this will significantly impact affordability of the home buyer.
The Budget also fails to address the larger issues facing the country, in terms of an urgent need to meet the shortage in housing, last estimated at a staggering 24.7 million units in urban
Mr. Santosh Rungta, President, CREDAI, further explains the danger and comments “The issue of applicability of the service tax levied on renting of commercial property and for under-construction units is a major area of concern for the developers. This tax will be an additional burden and project costs will shoot up by 4-5%. Consumers, thus will be most affected when this increased cost being passed onto them. Moreover, indirect taxes on raw materials for the industry like steel, cement, etc will further escalate project costs.”
A few provisions will undoubtedly provide relief to the real estate industry, which is attempting to recover after the economic slowdown during 2008 and 2009.
One such provision is the extension of the benefit of section 80 IB (10) of the Income Tax Act for another one year for projects that have been approved upto 2008, with the time limit for pending projects extended to 5 years instead of the current 4 year time frame. Similarly, the relaxation of norms allowing built up area of shops in housing projects from 2000 sq. ft. to 5000 sq. ft. is also a welcome move. However, CREDAI strongly feels that these benefits should be extended to all projects, irrespective of their date of approval for the sector to truly benefit.
Also, buyers of apartments will no longer be required to pay tax on deemed income owing to appropriate amendments in section 56(2) of the Income Tax Act. The 1% interest subvention of home loans upto Rs. 10 lakhs (for projects costing upto Rs 20 lakhs) has been extended by another one year. The announcement on extending the interest subvention by one year on housing loans upto Rs. 10 lakhs is a welcome move to benefit the small home buyers.
About CREDAI
It is the apex body of the organized real estate developers/builders across
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