Service tax would not be levied with retrospective effect

For the past one month, many city builders have been asking purchasers to start paying up the 2.5% service tax announced in the Union budget. Although the official notification from the ministry is expected any day now, market sources say that developers have informed buyers that the possession of their apartments would be held up in case they fail to cough up the amount.

The service tax will be charged on only those residential projects which are still under construction or where a completed building has not received its occupation certificate. Buyers say they were not informed of the additional levy when they had booked the flats.

Credai chairman Kumar Gera said, “It is the duty of the builder to collect this service tax from the purchaser and deposit it with the department. The developer is just a postman. It is ridiculous and makes a mockery of the government’s thrust on making housing affordable.’’ A year ago, Credai had worked out a rough calculation on a pan-India basis to find out the quantum of tax collected by by the local authorities, the state government and the Centre. “We found that on an average price of Rs 2,800 a square foot for a residential property, as much as Rs 850 goes towards various taxes, duties and levies,’’ said Gera.

A 1% VAT is also in the pipeline. Besides this, the builder has to pay development charges to the local municipal body. The service tax will be charged on only those residential projects which are still under construction or where a completed building has not received its occupation certificate. The service tax would not be levied with retrospective effect. “For those who have booked their flats some time back, this tax will only have to be paid on the remaining instalments and not on the entire value of the flat,’’ said Gera.

Source: Times of India

The net impact of the construction service tax would be only 3.3 per cent

As per the Budget proposal, the finance ministry has suggested that construction would be deemed to be a taxable service if the building or complex is still under construction and approval from the concerned regulatory authority hasn’t yet been granted. “The service tax and excise duty hike on cement would increase the overall cost of apartment by about 10%,” said Dharmesh Jain, managing director of Nirmal Lifestyles, a Mumbai-based developer.

Till now, for all apartments under construction, customers paid in installments based on plinth level construction and also on the progress in building activity. Banks too lent money to the customers according to the requirement of the builder. Now most developers would ask customers to pay the entire value of the building if they sought to lock in at a certain value. This would mean paying the entire sum before the construction.

Developers said the proposal could push home prices up by 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.“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 net impact of the service tax would be only 3.3 per cent, since there is an abatement of 67 per cent.

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. 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.

But there are other positive measures that the Budget proposes such as allowing pending projects to be completed within a period of 5 years instead of 4 years, for claiming deduction of profits, as one time interim relief.Developers have already increased prices by 15-20 per cent in the last nine months as demand for homes picked up.

Reference: business standard