Reddy to ask Finance Ministry to Review Service Tax on Housing Sector

S Jaipal Reddy, the urban development ministry will ask the finance ministry to review the proposal to bring the housing sector under the service tax net from April 1, 2010. “We will approach the finance minister in the next few days and ask him to review his decision of bringing housing under the service tax net,” said Urban Development Minister S Jaipal Reddy. He was speaking at a conference on Indian Real Estate organised by Associated Chambers of Commerce and Industry of India (Assocham). Real estate players and various industry chambers are already lobbying the government to withdraw the service tax imposed on the housing sector (at 3.3 per cent, with abatement) , as it would discourage buyers.

“This is not the right time for service tax implementation as the government’s objective is to encourage people to own houses. We have to wait for another month or so to see if the finance ministry listens to our request,” said KP Singh, Chairman, DLF Group. Addressing issues faced by the real estate sector today, the Reddy said availability of land — which is a state subject — has become a major concern. “If we want India to cater to the issue of demand and gap in the housing sector, apart from the central government, it is the state government which should become the facilitator.”

He also said since land is very limited, the best way forward is to go for vertical development (building high-rise buildings) instead of the present approach of going horizontal. “In Delhi, we would allow vertical development of real estate dwellings in older areas and remaining sprawl of Delhi provided the Municipal Corporation and Delhi (MCD) assure availability of all basic amenities such as water, power, etc.” In this regard, Reddy said the Ministry of Urban Development would soon come out with a new relaxed Floor Area Ratio (FAR) regime without specifying any time frame for it.

Another pertinent point that has been a concern for real estate developers is the number of clearances one has to take to start a project. “Today, there are more than 50 agencies from where we have to take our clearances. We have to ensure that the best way forward is to have a single window system as it would not only save time, but also ensure transparency,” said Navin M Raheja, Managing Director, Raheja Developers Ltd. “It is very important to have a single window clearance system in real estate sector,” echoed Anil K. Agarwal, Past President, Assocham.

Singh feels if real estate and urban development has to reach a self-sustaining level in India, “we have to follow the way it has been done in the telecom and IT sector”. “We need to have a visionary like Sam Pitroda, who can think centuries ahead in the real estate and urban development sector to formulate policies. Today, we are concentrating on meeting shortages, when policies are being framed. This needs to change fast, as we have to take the aspirations of people when we build a nation.”

Tightened Monitory Policy and Newly Imposed Service Tax Set to Boost Property Prices

Further monetary tightening by the Reserve Bank of India (RBI) and imposition of service tax on under-developed housing complexes, as proposed in the Budget 2010-11, will lead to increase in property prices, according to real estate companies. India’s central bank last week hiked two major policy rates - the repo rate and reverse repo rate - by 25 basis points each. “The recent monetary tightening by the RBI was on expected lines, but further tightening will certainly lead to increase in property prices. Further rate hikes will impact affordability of home loans,” K.P. Singh, chairman of DLF, India’s leading real estate developer, said here Friday.

“The monetary policy should be such as it encourages this important sector of the society. The policies should encourage people to buy homes, particularly the middle class who wants to buy,” he added. In the budget, Finance Minister Pranab Mukherjee proposed to bring development of real estate complexes under the ambit of service tax. At this, Singh said this is not the right time to impose service tax as the industry has just started recovering.

According to Navin Raheja, managing director of Raheja Developers, if the RBI hikes the key policy rates further and the government decides to impose service tax on under-construction apartments, “it will pressurise the real estate companies to pass on the burden to consumers.” “The prices of properties will go northwards in that case.”

Rules may be eased for service tax on realty

New Delhi:

Home buyers and property developers need not worry about being levied a service tax if they cannot procure a completion certificate from the local authority. The government could allow some independent authority to certify that the property is complete.

We are examining the issue and will see if a similar certificate from an outside agency can suffice, a finance ministry official said. Local authorities in some states do not issue completion certificates while others take many years to issue one.

The budget for 2010-11 has proposed to expand the scope of construction service to impose service tax on houses that are still being built.

The service tax will be levied only on 33% of the base price of a flat sold at construction stage. The effective service tax rate will work out to 3.3%,or 10% of 33%. Charges such as development fee, parking fee and premium location usually paid at the time of completion of construction will also be included in the base price.

The new rule will come into effect when Parliament approves the budget. Service tax will be levied only if payment is made before the completion of construction. Sale of fully completed houses will be exempt from the tax if a completion certificate from a local authority is provided.

The finance ministry may admit a certificate from an architect or builders association as a sufficient proof of completion.

Property developers had a mixed response to the proposal. Rajeev Talwar, managing director of DLF,t he country’s largest developer,felt the flexibility could be abused. However, an executive of Delhi-based developer Ansal API appreciated the governments decision. If the government takes the decision to outsource the whole process to an accredited agency, it will take the pressure off the realty firms.

Non-availability of completion certificate can increase the cost of a property as the 3.3% service tax would be significant, taking the tax element to nearly 10% after including the stamp duty.

Assocham Asks Govt to Withdraw Service Tax on Real Estate Sector

Industry body Assocham has asked the government to roll back the service tax proposed on real estate developers at the time of construction, as it would increase the tax burden on home buyers and impact the recovery of the sector. The government, in the Budget, said that real estate complexes will attract service tax, unless the entire consideration for the property is paid after the construction is complete.

In its post Budget memorandum to the Finance Ministry, Assocham had said that the real estate sector was gradually returning to normalcy and imposition of service tax on immovable property would increase the cost of housing by four per cent. “In addition, it would also make the entire housing facility costlier to end-consumer and will be contrary to government’s aim of providing affordable housing,” it said.

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.