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Govt may raise tax reprieve
April, 28th 2010

As calls for excluding land value from the ambit of service tax in the construction sector increase, the finance ministry is weighing other options to address the issue. The revenue department is considering raising the abatement provided to the construction sector from the current 67 per cent to 75 per cent, sources told The Indian Express.

According to sources, the option of separating land value from total cost is not a feasible option as it is as such difficult to assign a value to a piece of land. Even if floor rate or circle rate set by states are used, it would not be possible to establish the value of a flat, sources said. The proposal has been sent to the finance minister for his approval. Once the finance bill is passed, it would be notified, sources said.

Tax abatement is a reprieve from tax obligation. It may be partial or on complete value. It is usually provided by the government to boost growth in a particular sector.

We think the better way is to increase the abatement. We are weighing the option of increasing the abatement from 67 per cent to 75 per cent. That means that the service tax would be levied on 25 per cent rather than 33 per cent. The effective rate would then work out to be 2.5 per cent, the sources said.

The total tax on houses under construction is divided into two components services and materials. The government provides abatement assuming that the land value is included in it and is not subjected to tax. The remaining 33 per cent comprises services on which the Centre levies a tax of 10 per cent. The real estate sector has been opposing the proposal, arguing that the move would hurt the end user.

Real estate industry body CREDAI had submitted a memorandum to the finance ministry, asking the government to remove service tax on housing complexes under construction. The association said that levying service tax on real estate development could lead to an overall negative sentiment, although the amount collected through the provision may be small, and may result in a net loss of revenue.

Last month, CREADAI had threatened to move court if its demand for excluding land cost from the proposed service tax on housing complexes under construction was not met.

Officials in finance ministry said although tax revenue generated from the sector is not substantial, the government wants to tax the sector for better administration. Also, it is being seen as a step towards the introduction of the Goods and Services Tax.

ICAI has also made a case for deducting value of land from the total cost. It has said that when a prospective buyer makes an advance payment to the builder against booking of a specified unit in a building, that part also includes a price towards the land on which the building is being constructed.

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