Service Tax on Construction of house property in Budget 2010

Service tax may take toll on realty
NEW DELHI: After many months in the dumps, the housing sector was finally sniffing at a recovery as buyers returned gradually, lured by sharp price

cuts and teaser loans.

But a Budget proposal to levy service tax on houses under construction is threatening to crimp the sector’s fragile recovery as the resultant price hike is certain to dissuade fresh buyers. The proposal, a bolt from the blue, purported to spur builders into completing projects faster after rampant complaints of long delays.

Though that remains to be seen, an immediate effect will be the prices of incomplete houses rising by 3% after a service tax of 10.3%, including surcharge, is imposed. The levy is based on an earlier Income Tax Department circular, held up due to resistance from developers, which set 33% of the house price as services.

Housing project comprises land, raw material, labour and services. Though services include branding and selling of a project, there is an unwritten understanding that no ‘service’ was being provided till a developer passed a property title to a buyer.

Back-of the- envelope calculations show that a Rs 30-lakh housing property will see a price hike of at least Rs 1 lakh after the service tax is effected.

“Affordable housing will be impacted the worst,” said Niranjan Hiranandani, chairman of Mumbai-based developer Hiranandani Constructions, adding that everyone in that category must now pay developers in installments.
The Budget proposal, coming after the Reserve Bank of India’s incessant frowning on teaser loans, will wane demand further, say realty watchers.