Realty's concern over service tax  

While the remarks of the Urban Development Minister, Mr Jaipal Reddy, that he would take up the issue of service tax on builders with the Finance Ministry has come as a relief, the real-estate players in Coimbatore are concerned about the impact the new tax would have on the future of the industry.

They fear that the proposal would hit the industry in States such as Tamil Nadu where the industry faces high level of taxation due to stamp duty and VAT.

The service tax proposal comes at a time when there are fears that the income tax concession enjoyed by home loan borrowers may end if the new Direct Taxes Code proposals become law.

The real-estate developers in Coimbatore, who are seeing signs of recovery in the market, are apprehensive that the proposed levy of service tax may lead to flight of business to other States where the cumulative impact of taxes may be lesser.

They also face the prospect of having to recover the tax from the buyers of properties that have already been completed and occupied or shell out the money from their own pocket if the tax comes into effect retrospectively.

Double taxation

Mr Rajesh B. Lund, Vice-President, Confederation of Real Estate Developers' Association of India (CREDAI), Tamil Nadu and Col (Retd) A. Sridharan, Joint Secretary, Coimbatore Property Developers' Association (CPDA), said the spectre of service tax has returned to haunt the developers after more than a year following a clarification issued by the Central Board of Excise and Customs (CBEC) that any service provided by a builder in connection with the construction of residential complex till the execution of the sale deed would be in the nature of self-service and consequently would not be subjected to service tax.

However, if the services of professionals such as architects, contractors, etc, are engaged, such persons are liable to pay service tax.

But this is likely to end if the proposal in the latest Finance Bill is passed, as it seeks to bring within the ambit of service tax “construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised by a builder before, during or after construction.”

The Bill says that unless the entire consideration for the property is paid after the completion of construction (after receipt of completion certificate from the competent authority) the activity of construction would be deemed to be taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly.

Mr Lund said while builders invest their own money and borrow from financial institutions to fund projects, a significant portion of the cost is met through periodical payments made by the buyers and are linked to the progress of construction.

To save on the service tax on buyers, the builders could not take recourse to more borrowings because this would push up the project cost.

Different situation

Not many builders have the financial muscle to wait till the completion of a project to sell the apartments and as real-estate market dynamics fluctuate so much, builders cannot risk the prospects of waiting for completion of a project before selling it.

Col Sridharan said the situation in Tamil Nadu was very different from many States as far as the realty sector is concerned. The State levies a high stamp duty of 9 per cent that is much higher than what many other States such as Karnataka or Delhi levy. In addition, there is a 2 per cent VAT collected in Tamil Nadu. If the buyers are made to pay an additional service tax of 3.99 per cent, the cumulative difference would be close to 10 per cent in cost.

The developers argue that the new levy would amount to double taxation as the properties are required to be registered paying stamp duty and imposing service tax in addition to stamp duty amounted to a “clear case of double taxation”. Ideally, “there should be no service tax since this is an agreement for sale”.

Col Sridharan, visualising a post-service tax scenario, said it would push up the cost of construction, leading to shrinking demand. The developers would not be tempted to wait till project completion before making a sale since it does not make business sense.

Impact on business

A host of negative factors are already staring at the realty sector — there are already indications that banks may end the teaser interest rate policy and the rising interest rates may push up the home loan EMIs. More importantly, under the Direct Taxes Code, the Rs 1.5 lakh home loan interest adjustment against taxable income now available may go from the 2011-12 financial year, which would have a serious impact on the housing sector. If any service tax is levied on the housing sector, it would only add to misery of the sector.

Mr Lund hoped the proposed intervention of the Urban Development Minister would draw a positive response from the Finance Minister. The Government should seriously consider whether it is the right time to impose such a levy.

Source: Business Line, India, dated 04/04/2010