The service tax conundrum

Thanks to the proposed levy of service tax on developers, the realty market is abuzz with speculation over its impact on property rates.
Syed Amir Ali Hashmi checks out the likely repercussions Illustration: Abhimanyu Sinha

This year's budget has left aspiring homebuyers in a tizzy. Ashok Kumar, a chartered accountant, can't decide if he should wait and watch or buy his dream home. He fears he will lose out thanks to the price rise that the new service tax on real estate developers is likely to bring about. Just like Kumar, a number of people are seeking clarity on changes in price and demand that are likely to result from the 10.3 per cent spike in costs that developers will now incur.
Experts are unanimous in their views on the new tax impact. Prashant Kaura, founder and director, GenReal, says, "The impact of the service tax will be passed directly onto the buyer, resulting in an increase in real estate prices. So, for projects under construction, we will see a marginal price increase. Tax experts anticipate the increase to be about 3.4 per cent of sale value."
Agreeing to this, Avinash Narvekar, tax partner-real estate practice, Ernst & Young, says, "In case developers are dissuaded from accepting pre-sale advances because of the additional service tax liability, they may have to look for funding from banks to complete their projects.
This could, in some instances, escalate the cost of projects."
Sanjay Dutt, CEO business, Jones Lang LaSalle Meghraj, feels that the benefits implied by the tax savings and interest rate subvention will, to some extent, be negated by the service tax levied on properties in preferred locations and construction costs of yet-to-be-completed buildings. "Builders are likely to pass on this additional burden to customers by increasing property prices proportionately," he says.
Differing slightly with the above view, Navrekar says, "Whether (increased costs) are actually passed on to the buyer will depend on the level of demand. Increasing home loan rates will surely impact the demand adversely, which may not be offset by the increased disposal income accruing to individuals as a result of the raised tax slab. The equation might have been different had there been incentives that would drive demand stimulation, such as an increase in the existing Rs 1.50 lakh deduction for interest paid on housing loans."
He adds that overall, given the already high property prices and slowing demand for property, it is possible that some developers may choose not to pass on the whole burden of the service tax on to consumers. Across the board Kaura says the effect will be felt across India -on the projects under construction and those on sale. However, Navrekar says, "The affect may be relative to the category of homebuyers. While the affordable housing segment and developments in Tier-II and Tier-III cities are somewhat susceptible to the cost increase, given that the net impact is only 3.5 per cent."
Pratik Jain, executive director, KPMG, says that unless exemption clauses of the service tax are clarified, impact will be widespread. More clarity is also required on whether houses below the Rs 20 lakh to Rs 30 lakh price range will be exempt. Very little choice Kaura says buyers don't have much choice. "The cheaper alternatives will become more expensive. Since already-built options are usually more expensive than yet to-be-completed projects, the relative rise in prices would not be significant for under construction projects. If buyers are looking at cheaper alternatives, they are still likely to go in for under-construction developments."
Narvekar says, "Typically, properties are costlier when purchased after completion of construction. Thus, the buyer is likely to choose between comparatively lower prices of under-construction properties and constructed property with a higher price tag, though without the service-tax component."
What is clear is that the added costs are not likely to dissuade investors or speculators, nor will it impact developers significantly. The buyers are likely to be hit the hardest.
Courtesy: HT Estates 13 March 2010
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