Triple blow to housing construction

Bangalore's construction sector, among the most efficient in the country, sees the budget giving a cost push to housing which has already seen a cyclical price rise for over a year.

Steel and cement face new imposts which can get passed on, partially or wholly, to users like the construction indsutry. Plus, the industry faces a 10 per cent service tax.

Industry sources feel they can at least partly absorb steel and cement price hikes through efficency gains and economies of scale (by taking up multiple projects), but are not sure about the implication of the service tax announced by the finance minister in his budget for 2005-06.

On account of service tax, developers are anticipating a hike of Rs 35-40 per sqaure feet to the basic construction (without finishing) cost which is prevaling between Rs 300-350.

"Marginal changes in steel and cement costs can be taken care of through efficent gains and economies of scale. Steel prices went up from Rs 16,000 to Rs 17,000 per tonne to Rs 28,000 in the recent past, and now it is down at Rs 26,000 per tonne. We have lived with it but what is worrying is the new 10 per cent service tax," said J C Sharma, managing director, Sobha Developers.

Application of service tax on the sale price of a unit can really push up prices.

On the other hand, the picture chagnes if service tax is applied to the extent of value addition. Currently nearly 48 per cent of sale price goes in the form of taxes to the government, says Hemang Rawal, MD of Samruddhi Realty.

"It will be the mass housing projects having 40 to 300 dwelling units per projects which will get impacted. It is here both the buyer and builder are in a dilemma as to who will foot the service tax tab", says K N Narayana Iyengar chartered engineer and registered valuer.

Currently the sector pays stamp duty for land purchase, raw materials attracts 4 to 6 per cent sales tax, the contractor pays 10 per cent service tax during construction and 4 per cent towards work contract tax.

"We are not yet clear on how it will be calucated, but it should be only an value addition. Registeration and stamp duty now account for 10 per cent, sales tax, inclusive of set off, another 5 per cent. If things keep getting added on, then what happens to affordable housing", asks Sharma.