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Service tax on housing: Good or bad?
July, 03rd 2010

Barely has the residential real estate market begun to swing back when a spate of new laws have come into force, which may push the prices of the residential units further up.

The central government has brought in a service tax of 2.5 per cent on the actual sale value on all under-construction projects beginning July 1.

In the last few months, real estate in Mumbai has witnessed an increase in pricing by 30-35 per cent.

Developers and industry experts have expressed their dissatisfaction about the issue, more so because at the fundamental level housing is a tangible product which once sold does not have any recurring service value attached to it from the seller.

Rajan Daryani, President, CREDAI, Maharashtra, explains that the genesis of treating housing as a service goes back to a judgement by Karnataka High Court, which passed the resolution that all works contract would attract service tax.

In Karnataka, the stamp duty was very high, hence the developers would typically split the plot and pay duty on one part, while the other part was brought under joint ownership through an agreement, which was then given out on work contract to develop. So the High Court rightly passed the judgement that any work contract job would attract service tax.

He adds, "The government took a carte blanche approach of bringing housing under service tax across all states. In January 2009 the government passed a resolution that selling a house is not a service.

Now in its misplaced interpretation have brought realty as a whole under service tax regime, despite our repeated talks with them.

This would have an adverse effect on real estate pricing with additional burden of 2.6 % service tax apart from 1% VAT besides 5% stamp duty, 1% registration charge and now 1% labour cess. So there is 10. 6 per cent increase on price. And this is in addition to service tax and VAT paid by the developer when constructing.

Daryani continues, On one hand the government is talking about affordable housing and on the other nothing is being done to incentivise it."

Kaizad Hateria, GM, Sales and Customer Relations, Rustomjee Group says, "This is like arm twisting from all quarters. In how many ways would the government tax you? Housing is not 'service' by any definition. The government is acting against its own agenda of pushing the GDP growth."

Hateria points out that real estate is the second largest employer after agriculture. By creating bottlenecks and finding every opportunity to make money in the short term, they are pushing aside the long-term agenda of making real estate a contributor in the economy.

"The industry takes along with itself at least 300 other industries. The government has increased fuel prices, which would have a direct impact on all products used in making a home. All of these will slow down sales and there would be no revenue coming to the government. Who benefits?" asks Hateria, exasperated.

Ravi Ahuja, Executive Director, Development Services, Cushman & Wakefield, India also says, ''It will be detrimental for the low and mid-segment residential sector which is already facing the heat of high home loan interest rates.''

He points out, "As per this law, purchase in a new building is exempted from service tax once it has received completion certificate. This may result in a drop in pre-commitments from investors and affordable housing buyers resulting in project finance concerns for developers. Many buildings do not have a completion certificate as developers have only obtained Occupation Certificates; the law needs to clarify if OC obtained buildings will be exempt or not."

Similar is the view of Ashok Mohanani, Chairman, Ekta World, who says, "Not enough housing stock has been added in the affordable segment, which would be worst hit. The new launches have happened in the premium segment where one or two per cent increase won't matter, but housing is a need for the masses.

Ahuja points out that as most developers finance their projects through pre-commitments which are done in the early stage of construction, the new tax levy will force many endusers as well as investors to relook at their budgets as well as cash flows.

Developers' bodies have taken a strong view on this. Sunil Mantri, President, Maharashtra Chamber of Housing Industry (MCHI), says, "MCHI is concerned about the issue and has already taken necessary steps towards this. The provision to levy service tax on transaction of sale of immovable property does not fall under services and MCHI is considering filling of a writ petition in the high court to challenge the service tax levied on buildings under construction for the benefit of all."

Of course, Rajan Daryani is critical of the fact that the government is going against the mandate of National Housing and Habitat policies approved by the Parliament. "There is a need for 24 million houses and this cannot be achieved by their own agencies alone. They have to incentivise housing.

As the president of CREDAI, Maharashtra, he says, "CREDAI would continue to represent its view to the government until the problem is resolved. The Karnataka High Court judgement itself is now challenged before a larger bench in Supreme Court. The government should have waited for the final judgement. Moreover GST is coming in from April 2011, so where is the need to introduce a new tax for just nine months?"

Both the bodies are planning to move the court as housing being a basic need cannot be squeezed in various different ways.

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