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Indirect tax dreams of the real estate sector
February, 22nd 2010

The year 2009-10 was very challenging for the real estate sector which witnessed steep decline in prices and strained liquidity/ credit positions, resulting in delay in the completion of projects, lack of sales and high borrowing costs, reminisces Mahesh Jaising, Partner with BMR Advisors, Bangalore.

Although during the later part of 2009 the sector witnessed a recovery of sorts, it is faced with a new challenge of declining affordability/ reluctance on the part of the end users to spend high, resulting in the emergence of affordable housing as the next big opportunity in the residential real estate space, he adds, during a recent pre-Budget email interaction with Business Line.

Excerpts from the interview.

On affordable housing.

To support affordable housing, the Government should come up with a policy addressing liquidity issues, financing aspects and extending fiscal incentives to the sector. The policy should seek to minimise the tax costs in the supply chain which go to increase the end price to the buyers and extend stamp duty exemptions to such projects.

On the service tax woes in residential projects.

As regards the residential projects in general, the issue of applicability of service tax on sale of residential units to the buyers is still dogging the industry. At the ground level, the position of no service tax is linked to the method of contracting for residential units with the purchaser.

In some cases, the developers who have rightfully sought to pass on the benefit of no tax to the end users are being slapped with demands and are forced into litigation, while the buyers are being burdened with tax in some other cases.

The Government would do well to address this issue in this Budget by removing residential projects out of the service tax net or at least by clarifying that no service tax is payable on the transactions between the builders/ developers and the purchasers irrespective of the method of contracting.

On commercial real estate.

On the commercial real estate front, the controversy on the applicability of service tax on lease rentals continues to plague the industry, especially after the Delhi High Court ruling in the Home Solution Retail India case which strikes down the levy of service tax on commercial rentals.

While a number of tenants refused to pay service tax to the landlords based on this decision, the Department issued a directive to its officers to pursue taxpayers to pay up the service tax due as the Department had filed an appeal to the Supreme Court.

In a recent development, providing a much-needed relief to the landlords/ developers, the Delhi High Court has instructed the Department to abstain from issuing any such instruction calling upon the taxpayers to pay service tax or to issue notices/ demands. The Government has assured the Delhi High Court that corrective steps shall be taken to suppress these instructions.

This Budget may see these instructions being rolled out. It would be better if the Department comes out with a detailed circular keeping in abeyance the levy of service tax on the commercial rentals till the matter is finally decided by the Supreme Court.

On the hospitality sector.

The hospitality sector could continue to be outside the service tax net. This sector pays a high rate of luxury tax to the State Governments, which is expected to be merged with GST.

With the introduction of GST and resultant constitutional amendments being round the corner, it is unlikely that Central Government would encroach on the powers of the State Government to impose service tax on this sector in this Budget.

On other tax issues.

The Budget 2010 is well placed to deal with the challenges of liquidity and demand still being faced by the real estate sector. The Government could look at empowering the end users to spend more by increasing the limit for income-tax deductions on interest and principal repayments with respect to home loans.

The income earned by the developers from affordable housing projects should be extended tax holidays to adequately incentivise the developer community, in a measure to achieve the age-old Government objective of home for all.

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