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Service tax to be dampen
March, 10th 2010

The Union Budget 2010-2011, aside from some small provisions, failed to provide an overall and clear stimulus to the housing and real estate sector, which clearly is an important contributor to Indias GDP with great potential to grow, said a CREDAI statement.

In the context of Indias phenomenal housing shortage of 24.7 million units approximately and a huge need for space infrastructure to support its growth, CREDAI feels the Budget has failed to adequately support this sector and hampered its efforts to reach its potential.

The most disappointing feature in this Budget for the realty sector is the levy of Service Tax both on renting of commercial property and on sale of under-construction housing units, said the statement.

According to the provision, unless the entire consideration for the property is paid after the completion of construction (i.e. after receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service, provided by the builder/promoter/developer to the prospective buyer and Service Tax would be charged accordingly.

Effectively, this means all buyers would have to pay Service Tax for the purchase of any apartment and/or commercial units. The tax amount will come to about 3.5% of the cost of the apartment, which includes the value of land and also the cost of construction.

CREDAI sees two serious flaws in this provision.

First, the sale of apartment/commercial spaces is a sale of immovable property and is governed by the Transfer of Property Act. It cannot, therefore, also be a service attracting service tax. Second, all states require buyers to pay Stamp Duty on the transfer or sale of apartments and commercial spaces and this ranges from 5-9% across the country, said CREDAI in the writtern statement.

Kumar Gera, Chairman, CREDAI, said, I would say this budget by and large is a one in which status-quo is being maintained for the real estate sector. The issue of applicability of service tax to all under construction flats and homes being booked prior to completion will increase the end cost and this will significantly impact affordability of the home buyer.

The Budget also fails to address the larger issues facing the country, in terms of an urgent need to meet the shortage in housing, last estimated at a staggering 24.7 million units in urban India alone.

Despite the governments stated desire to address this shortage through a PPP model, the Budget has made no provision to provide incentives that will attract private developers to take up more affordable housing initiatives. The high expectations for a push by way of incentives for slum redevelopment or slum eradication schemes in this budget have also not happened.

The payment of Stamp Duty and Service Tax on the same property constitutes a clear case of double taxation. Moreover, the National Habitat Policy governs the policy of development of housing in the country, which urges all the State Governments to reduce the Stamp Duty and bring it down to 2%-3%.
Imposing a new tax is contrary to the declared policy of reducing the transaction costs on the sale of immovable property.

Santosh Rungta, President, CREDAI, said: The issue of applicability of the service tax levied on renting of commercial property and for under-construction units is a major area of concern for the developers.

This tax will be an additional burden and project costs will shoot up by 4-5%. Consumers, thus will be most affected when this increased cost being passed onto them. Moreover, indirect taxes on raw materials for the industry like steel, cement, etc will further escalate project costs, Rungta added.

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