High house rents may draw service tax

Tax experts believe the 2012-13 Budget may bring monthly house rents of above Rs 1 lakh under the service tax net. But real estate players are not worried. They argue if one can pay a monthly rent of Rs 1 lakh, he can pay service tax as well.

They say the ministry may either bring a negative list on services, which will automatically bring rents on residential dwellings under the tax net, or specifically mention this category to be included in the service-tax ambit.

The negative list, which the Centre proposed and the states agreed with some riders, includes only monthly rent below Rs 1 lakh. “The finance ministry may bring housing rent above a threshold in the service tax net,” according to Vivek Mishra, indirect tax expert at Pricewater-houseCoopers . “The threshold may be Rs 1 lakh a month.”

While some others believe these rents may come under the service tax net through the negative service list, Mishra says any such list might not come in the Budget.

The real estate industry is not resisting the idea, as they think it will have no impact on the common man or the idea of affordable housing in any way.

R R Singh, director-general of the National Real Estate Development Council, says the rentals as high as Rs 1 lakh per month exist only in the prime and posh locations. “A person who can afford to pay rental of Rs 1 lakh a month is, of course, in a position to buy two-three houses of his own,” he argues.

“For a person who can shell out over Rs 1 lakh a month, paying a tax of Rs 10,000 would not be a problem,” Singh told Business Standard.“It will not impact the common man. So, we will not be deterred if the finance ministry goes ahead with this move.”

Service tax is levied at 10 per cent, unless specified for particular services.

Anshul Jain, CEO of DTZ (India), says there is lack of clarity on whether putting immovable property on rent for residential purposes comes under service.

“But since the amount of rental per month, that will be under the purview of this legislation, is very high, this will be applicable on a minor set of people.” Perhaps the thought behind this legislation is to tax the rich, Jain says.

The real estate industry in its pre-Budget recommendations has asked the government for promotion of rental housing as every one cannot buy a house.

Royal Institute of Chartered Surveyors (RICS) had also suggested lowering of the tax rate on rental income from 30 per cent to 20 per cent, along with taxing only 50 per cent of the rental income as compared to the current 70 per cent. “The low yields on rental housing remain a bottleneck for promoting a healthy rental market,” says Sachin Sandhir, managing director (South Asia) of RICS.

According to estimates, there is a shortfall of 26 million houses in the country.