No taxing time for real estate: Govt

TREN/05 March 2010: The Government clarified yesterday that the net impact of service tax on real estate construction is negligible and is definitely not a burden. Clarifying the issue, the Government representative said that since construction services attracts service tax only on 33 per cent of the total value, the net impact of service tax on real estate construction is only 3.3 per cent. This clarification came on the back drop of the union budget 2010-11 presented last week in which service tax net was widened to cover transactions such as  leasing of vacant land and commercial spaces, full payment by prospective home owners to developers before the completion of the construction, charges towards preferred location, among others.

Post-Budget, there was a widespread feeling the property price may go up by approximately 10 per cent in Tier-II and Tier-III towns and 0.5-4 per cent in big cities such as Mumbai and Delhi which have higher land prices. The finance ministry official commented, “There is a false impression being created that prices will go up by 10 per cent but the fact is that 10 per cent service tax is levied only on 33 per cent of the value,” said the official.

The budgetary clarification has been issued with retrospective effect from 2007, when real estate transactions were brought under service tax. Abatement scheme, under notification number 1/2006 dated March 1, 2006, says that the contractor is entitled to claim abatement to the extent of 67 per cent of the value of services rendered by him. In effect, the contractor would have to pay service tax only on 33 per cent of the value.

Stung by new service tax proposals on property transactions, real estate bodies such as the Confederation of Real Estate Developers Associations of India and Maharashtra Chamber of Housing and Industry plan to approach the finance ministry to seek rollback of some proposals. Developers have already increased prices by 15-20 per cent in the last nine months as demand for homes picked up. This resulted in demand tapering in January and February.