Get ready to pay more for flats or houses you book in an under-construction project. If the Budget proposals go through, builder services will come under the service tax net.
According to the Budget proposal, real estate developers will have to pay a service tax on transactions or sales, where the booking amount is collected from prospective buyers before the project is completed. This means, a tax of 10.3% would be applicable on one-third (33%) of the price of the apartment, which will be passed on to customers.
Illustration by Jayachandran / Graphic by Ahmed Raza Khan / Mint
This tax is based on an earlier income-tax department circular, which stipulated that 33% of a house’s price was to be considered a service.
Ravi Ahuja, executive director, development services (India), Cushman and Wakefield, a real estate consultant, says, “The regulation is just a measure to increase revenue. However, this would increase the acquisition cost of buyers.”
Other services provided by builders, such as providing preferential location charges (PLC), external and internal development charges (excluding parking space) will also come under the new tax axe. All this will cost you an additional 3.3% on average. So, on a property worth Rs1 crore, it would mean an additional Rs3.34 lakh.
Anil Kumar, deputy managing director and CEO, Ansal Properties and Infrastructure Ltd, says, “The total hike should be around 4% if we take into account tax on PLC. The hike will also depend on the nature of the project, location and land cost recovery.”
Who will be hurt?
The builders, in all likelihood, will pass on this additional cost to the customer. Says Rajeev Talwar, managing director, DLF Ltd, a real estate developer: “What is the service involved on preferential location charges? With other forms of taxes such as stamp duty, external and internal development charges, what is the need for this additional tax? By this move, prices will definitely go up. And these will be passed on to buyers.”
“Developers who have been operating on high margins will try to achieve an internal rate of return of over 20% on affordable projects even after this additional tax burden,” says Sachin Sandhir, managing director and country head, Royal Institution of Chartered Surveyors (RICS) India. The institution is an international expert on real estate valuations.
Small cities are still emerging as real estate destinations, after the metros. Even a slight hike in prices would affect the buying capacity of prospective customers in these cities. Gaurav Mittal, chairman, CHD Developers Ltd, says, “This will hit the tier II and tier III markets.” CHD Developer has got residential projects in small cities such as Mathura and Karnal.
Though you do pay more, experts say that this would be a more transparent system. “Now builders will have to disclose the additional charge,” says Ahuja.
Sandhir says there are two sides to the coin. “This would force them to speed up the construction. But this may also lead them to ask for the down payment mode as opposed to the construction-linked plan, which eases the burden for the customer,” he says.