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Service tax levy rationalised
May, 10th 2010

Last week, home seekers had reason to rejoice. The Finance Bill that was finally passed in the Lok Sabha, had a sweetner attached. It proposed to provide the tax relief to construction sector by enhancing their rate of abatement from 67 per cent to 75 per cent of the gross value, where such value includes the value of the land constructed upon. Therefore, the service tax would now be levied only on 25% of the cost of the house, as compared to 33% earlier. At a rate of 10.3%, it would now come to about 2.5%.

"This effectively means property prices would rise by a lower than expected 2.5 to 3 per cent" said Ashok Kumar, Principal & Managing Director, CresaPartners. According to him, the good news is that the government announced a slew of concessions for urban housing for poor, service tax, among others, as part of the Finance Bill that was passed last week.

"In a relief to realty sector and home buyers, the Finance Minister announced tax concessions to the construction sector, which was brought under the ambit of service tax in this year's Budget. With this announcement, service tax would be levied on 25 per cent of the gross sale value of property compared to 33 per cent proposed in the budget this year.

It is proposed to provide the tax relief to construction sector by enhancing their rate of abatement from 67 per cent to 75 per cent of the gross value, where such value includes the value of the land constructed upon. Also, to give thrust to the low cost housing schemes for the urban poor, FM announced exemption of service tax on constructions under Jawaharlal Nehru Urban renewal Mission and Rajiv Awas Yojna," he added. However there is still a request from the industry to remove service tax entirely, he pointed out. .

Harishanker Subramaniam, Partner-Indirect tax, Ernst & Young, opined that "The amendments to Finance Bill with respect to increase in abatement from 67% to 75% on taxable base for the proposed levy of to Service tax on under construction property is a welcome move. Whether this increase in abatement is sufficient to negate land cost which forms significant value of gross taxable base on which such abatement applies is debatable and hence maybe viewed by the industry as a partial relief."

Confederation of Real Estate Developers' Associations of India (CREDAI), also responded on the Service Tax passed by the Lok Sabha. Kumar Gera, Chairman of CREDAI, shared, "We appreciate the government's gesture in increasing the abatement from 67% to 75%.

This would mean that the service tax charged on the cost of apartments would go down to about 2.5% from the earlier proposed 3.3%. We however feel that the method of calculation for the same is unjust as land, the biggest component in the cost of a residential unit, should not be taxed as a service. In the present proposal, the abatement given (where cost of land is included in the price of the apartment) will be unjust.

To illustrate, if there are two identical apartments - one is priced at Rs. 3000 per sq. ft. and the other at Rs. 15000 per sq ft. Prices vary only due to the location (and therefore the value of land). The service tax amount in one case will be Rs. 75 per sq ft and in the other case Rs. 375 per sq ft. As the service element is the same in both cases. How is this variation just? The fine print, when available, will hopefully address these issues.

This process will lead to complications and also pose difficulties for the buyers in understanding how and what they are being taxed for. The applicability of the tax on projects that are under construction currently is also a matter which requires clarity. Home buyers as well as developers at the moment are not sure if they will be taxed fully or partially for bookings already made on under construction projects.

The practicality of implementing this tax will also face hurdles as the provisions and methodology for issuance of completion certificates vary across states. It is also worth mentioning that with the Goods & Services Tax (GST) expected to be introduced soon; this action looks unnecessary and would invite further complications when the GST is brought into effect," he added.

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