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 sectors 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 Indias incessant frowning on teaser loans, will wane demand further, say realty watchers.

Most houses are typically sold during construction with buyers paying in phases. The Budget proposal means that even buyers who have to pay, say, the remaining 5% of the overall cost during possession, will have to cough up more.

The proposal could also pose problems in calculating remaining payments though it will ratchet up demand for
ready-to-move properties, say realty watchers.

As for developers, the markets response to the proposal will determine their long-term plans. Affordable housing will now become unaffordable , said Rajeev Talwar, managing director of DLF, the countrys largest developer.

Housing is a state subject and the move is impinging. Real estate was among the worsthit sectors in the global downturn as buyers kept away and banks became wary of lending. But teaser loans, some even as low as 8.25% much below their prime lending rate (PLR), last year stalled the decline.

But builders fear that the introduction of a service tax and absence of teaser loans will compound the problem of oversupply of residential and commercial properties in several parts of the country.