Houses to cost more after service tax

Mumbai: Get ready to cough up more for your dream house. That's because now, home buyers will bear a 10% service tax on properties under construction. This, even before the title transfers from the developer to the consumer.

Union Budget 2010 may have put more money into the hands of consumers. But that promise does not hold true for home buyers.

A 10.3% service tax is now applicable on all under-construction properties. So far, till the title in a property was passed to the buyer from the developer and the occupation certificate was handed out, it was understood that there is no "service" that was being provided to customers.

However, now the proposed change in the law defines "service" as any receipt of money from the buyer to the developer.

"Service tax was imposed on developers in 2005. In 2009, the government issued a clarification note based on which we sought legal opinion. And, we were advised that developers did not have to pay service tax," said JC Sharma, MD, Sobha Developers.

"In this budget what clarity we have got so far is that on the construction agreement we are paying VAT. And, we have an option to charge 33% on that construction agreement and the 10% service tax on that amount."

However others are estimating a price rise of 5 to 6 percent.

"It's quite a serious dent in the business of real estate in India. I think this is the first time when tax at source on payment of instalments is likely to be taxed at the initial stages and I think it's disastrous for affordable housing," said Niranjan Hiranandani, Chairman, Hiranandani Constructions.

Experts say this may also trigger some delay in launches as developers are likely to revise price points.

While, this will particularly impact residential sales as cash flows begin in the form of booking amount and instalments as soon as the developer launches projects, the government has stated it will also be levied on commercial properties leased.

While there is still no clarity when this taxation will be effective, a price increase seems imminent on the cards.