Currently, under the Income Tax Act, 1961 (the Act), an individual can claim a deduction for interest paid on housing loan for a self-occupied housing property for up to Rs 1.5 lakh in a financial year subject to the fulfilment of certain conditions. Furthermore, a deduction may also be claimed up to Rs 1 lakh for repayment of principal amount of the housing loan.

There were expectations that the above limits may be enhanced to provide some relief to the common tax payer. No additional concessions have been provided to the individual tax payers on this front in the Budget. Some relief though has been provided to the undertakings engaged in building housing projects in respect of extension of time period for completion of such projects and relaxation in norms for built-up areas for shops and other commercial establishments.

Its, however, important to note that certain proposals on the indirect tax front could adversely impact the cost of the housing projects and thereby, increase the price of residential units. In this context, following points merit attention:

Increase in excise duty

In general, the standard excise duty rate of 8% has been increased to 10% on all goods, including steel, iron, etc. Excise duty on another main input of a housing project, ie cement, has also gone up.

Duty hike in these essential inputs would impact the cost of the construction since in many cases builders may not be able to claim set-off of duty paid on these inputs.

Projects under construction

Besides duty hikes in essential inputs, the government has also proposed to extend service tax to real estate, including residential units. Through this proposal, the government intends to levy service tax on sale of property by builder to buyer if any part of the consideration for the property is received before the completion of construction, ie before the receipt of completion certificate from the competent authority.

In such a situation, the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer, and the service tax would be levied accordingly.

In this context, a question arises from a buyers perspective whether buying a housing unit for which he is making payment in instalments actually involves any service being rendered per se by the builder.

Also, it is not clear whether the proposed levy would impact only new projects or it would even cover the existing projects where booking has already been made by the individuals and part-payments made while construction is at different stages of completion.

If implemented , this proposal could lead to increase in prices of the property by about 3.4% of the sale price, and not 10.3% as is being generally understood, since service tax on such services is payable only on 33% of the value of the property.

Preferential location

Another major setback has been the proposal to levy service tax @10.3% on any preferential location charge or other development charges recovered by the builder except charges in relation to parking spaces.

Most of the housing projects have different cost components like preferential charges for certain apartments due to locational advantage.

These components may now be subject to service tax. This proposal is also likely to push the cost of housing even further.

To sum up

The levy of service tax on housing projects would increase the price of the housing units, if the Budget proposals are accepted in the present form. One should, however, hope that at best the said proposals are made applicable to the new projects and not to the existing projects which are at different stages of completion.

As most of the current housing projects have been delayed beyond any control of the buyer, in the whole bargain, the common man should not be burdened further.