Property buyers in Mumbai and the rest of Maharashtra will now have to spend more, as the state government has issued a notification on the imposition of 1 per cent value added tax (VAT) on the contract price of flats mentioned in the agreement of sale registered on or after April 1.

This would be in addition to a 5 per cent stamp duty, 2.38 per cent service tax and 1 per cent local self-government tax in certain districts. The total burden comes to 8.38 per cent in Mumbai and 9.38 per cent in other places.

In the case of Mumbai alone, a flat buyer, who has made registration on or after April 1, would have to bear an additional burden of Rs 4,000-5,000 in his equated monthly instalment (EMI).

The government hopes to mobilise an additional revenue of Rs 1,000 crore, with the imposition of 1 per cent VAT. The notification was issued on July 13 in accordance with the announcement made by the state finance minister during the budget for 2010-11, a senior state government official told Business Standard.

The official informed that the 1 per cent VAT was part of a composition scheme for the builders and developers. Under this scheme, one per cent VAT would be payable on the contract price of flats mentioned in the agreement of sale. However, such builders and developers would not be eligible for set off under the VAT Act.

However, the government has come in for sharp criticism from the realty sector following its decision.

The stamp duty is levied on the realty sector, and in addition to this, the industry has to pay service tax. Now VAT will be imposed as done in case of the manufacturing industry.

All the government is looking at is raising revenue from real estate and meeting its shortfall, but without evaluating the merits of the business. Ranjit Naiknavare, executive committee member of Confederation of Real Estate Developers Association of India (Credai), said.

He noted that the government was eventually penalising the customer, especially when it was advocating affordable housing schemes.

Naiknavare explained that the realty industry was already burdened with 25 per cent taxes on material components. If you add stamp duty, service tax and VAT, the entire tax component goes up to 35 per cent. In addition, the industry has to pay various cess and duties imposed by civic bodies. In Pune, the municipal corporation cess for commercial properties is Rs 400-500 per square feet and for residential properties Rs 300-400 per sq ft, he said.

Rajesh Mehta, CMD of Raha Realtors, termed the governments move retrograde as it would make it very difficult for the common man and working class to purchase properties.

Sunil Mantri, president of the Maharashtra Chamber of Housing Industry, said: Its high time that the government to considers how much taxes we should levy on consumers. A home for every one or affordable housing will not become a reality if the consumer has to bear a transaction cost of 30-35 per cent. We will request the government to reconsider its decision.