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.

Gain’s real for realty, but outside city limits

Ashish Jagnani, vice-president, equity research, Citi puts forward his view on Budget 2010

We believe the Budget is largely neutral for the real estate sector. While continued measures to boost affordable housing as well as higher investments for rural housing and urban development (particularly for slum redevelopment) are positives, the higher cost of material (due to excise rollbacks), increase in MAT and the likely inclusion of service tax on construction activity could offset some of this impact.

Continued incentives to boost affordable housing include extension of the 1% interest subsidy on housing loans up to March 2011. The Budget has proposed extending the tax holiday under Section 80 1B (10) on approved projects, provided these are completed before March 2013, compared to the earlier March 2012.

On the positive side, there will be no extension of STPI benefits beyond March 2011. This augurs well for IT special economic zones in terms of faster leasing. Widening of personal tax slabs is a welcome move for the middle class as it improves affordability. This, in turn, should benefit the housing sector.

Among the negatives, the move to hike MAT to 18% from 15% will hurt companies engaged in airport redevelopment and slum rehabilitation. The likely inclusion of developers’ construction activity in the 10% service tax net is still a grey area.

Prima facie, we do not foresee a strong sector outperformance on the back of the Budget. The interest subsidy will benefit developers with a residential bias in Tier-II and III cities. Source: MagicBricks