Realty developers not pleased at many Budget details

However, hotel industry welcomes expansion of investment-linked deduction.

The devil is in the detail for the real estate sector. Though the Budget gave sops to home buyers in the form of tax savings and interest rate subvention, it quietly brought back service tax on lease rentals in the Finance Bill.

Builders said they’d pass on the service tax burden to customers. The silver lining was that the continuation of interest rate subvention and higher disposable income in the hands of individuals through income tax reliefs would more than make up for it.

The Budget announced a maximum tax savings of Rs 20,000 for those earning an annual income up to Rs 5 lakh and up to Rs 50,000 for those earning up to Rs 8 lakh. This additional income is likely to find its way towards buying homes.

Says Aashiesh Agarwaal, research analyst at Edelweiss Capital: “For people getting an annual income of Rs 8 lakh, there will be a saving of 10 per cent, which will increase disposable income and their affordability. This will mean they can pay a higher EMI and be eligible for loans of higher value.''

This Budget also extended the interest rate subvention on a housing loan up to Rs 10 lakh where the house price is up to Rs 20 lakh, announced in the earlier Budget, to March 31, 2011. But, many developers are unimpressed. “Overall, home sales may go up, but there is no incentive for developers to launch more affordable housing projects. Why should we?'' said Niranjan Hiranandani, managing director of Hiranandani Constructions.

Service tax worry
The biggest worry of developers is re-introduction of service taxes. In April 2009, the Delhi High Court stayed the tax on lease rents when some retailers approached it, opposing the government move to impose it. According to the Finance Bill, service tax would be levied for renting immovable property or any other service to such renting with retrospective effect from June 1, 2007. The service tax rate is 10 per cent now.

Buildings under construction and the leasing of vacant land would also attract service tax, the Bill says.

“The levy of service tax will increase the price of properties. This has come as a dampener, as even renting under-construction property will attract service tax now,'' says Jai Mavani, executive director and head of the real estate practice at KPMG.

Some developers are unmoved. “We will transfer the service tax to home buyers and to that effect there will not be any additional liability,'' said Sarang Wadhawan, managing director of HDIL, a Mumbai-based developer.

Other spurs
Though the Budget allowed projects started before March 31, 2008, to be completed within five years instead of four for claiming deduction of their profits as “one-time relief to the sector'', developers and consultants said the measure does not help much. “It is unfortunate that the commencement date of March 31, 2008, has not been extended but the period for implementation has been extended by one year. Hence, the impact of the amendment would be marginal,'' said Pranay Vakil, chairman of Knight Frank India, an international property consultant.

However, the hotel industry gave a thumbs-up to the finance minister's move to give investment-linked deduction to new hotels in two-star or above categories.

The benefit was hitherto available to certain states such as Uttarakhand and Himachal Pradesh; it has been extended to all. It allows 100 per cent deduction in respect of the whole of any expenditure of a capital nature (other than on land, goodwill and financial instruments).

“It's a good measure that will boost investment in the tourism sector, with high employment potential. Also, the fact that the benefit is made available to hotels across the board will boost investment in all categories,” said a Delhi-based analyst.