Stung by new service tax proposals on property transactions, real estate bodies such as CREDAI (Confederation of Real Estate Developers Associations of India) and Maharashtra Chamber of Housing and Industry (MCHI) are planning to approach the finance ministry to seek a rollback of some of the proposals.
The government yesterday brought transactions such as leasing vacant land and commercial spaces, payment made to developers before the grant of completion certificate and imposing preferred location charges among others under service tax net.
The transactions now attract a service tax of 10.3 per cent. Developers complain that levying service tax on payments during construction will push up prices and reduce home sales.
The proposal, according to developers, could push up prices by 10 per cent in Tier-II and Tier-III towns and 0.5-4 per cent in big cities, which have higher land prices. Service tax is calculated on construction cost.
For instance, in South Mumbai, where apartments are priced at Rs 35,000 per square feet, the effective tax burden will be 0.5 per cent (10.3 per cent on construction cost Rs 2,000 per sq ft). A house of 1,000 sq ft will attract a tax of Rs 175,000.
But in Umargaon, which is around three-hour drive from Mumbai, where apartment prices are around Rs 1,200 per sq ft, the service tax burden will be 7.25 per cent (on construction cost of Rs 900 per sq ft).
Developers have already increased prices by 15-20 per cent in the last nine months as demand for homes pick up. This has resulted in demand tampering off in the last two months.
“Either prices have to correct now or developers have to pass on the burden to buyers. I think the second option is most likely to happen. If that happens, home sales will certainly go down,” Krishnan, partner, real estate practice, Ernst & Young.
Adds Kumar Gera, chairman of CREDAI and Gera Developments: “It is a burden on buyers and not on developers. Anything that increases prices reduces affordability. If developers have margins, they will absorb it, otherwise they can't.” “We will approach the government to reconsider the proposal.”
Krishnan said that by levying new service tax, the government had sent out a signal to the developers to reduce prices and clear their inventory.
Developers said the increase in excise duty on cement and steel, the key ingredients in construction, is also likely to see increase in prices. Excise duty on cement and steel have gone up by 2 per cent. Cement prices are likely to go up by around Rs 8-10 a bag of 50 kg, while the prices of steel are likely to increase by around Rs 600 a tonne.
“The budget proposals are death knell for the affordable housing in the country. If housing will be taxed so heavily, how can you expect us to build homes. There is no other option before us than going to the government and ask for roll back,” said Niranjan Hiranandani, managing director of Hiranandani Constructions.