Immovable property prices in India, particularly housing prices, continue to prevail at high levels in spite of the economic slowdown worldwide and in India, and continue to remain unaffordable and beyond the reach of the common man. One would have thought that the government would take some measures to make housing affordable for all. On the contrary, the real estate sector continues to be one of the most taxed sectors in India, with the government further increasing taxes on transactions in immovable property.
What are all these taxes that you pay when you buy a residential house? These include stamp duty, registration fees, value-added tax (VAT) and service tax. Most of these are levied by state governments and, therefore, vary from state to state, but the service tax is levied by the Central government and is, therefore, uniform across India.
The major visible component of the tax that you pay is stamp duty, which varies across different states. For example, in Maharashtra it is 5% and some states levy even higher stamp duties. Of course, at one point of time, this was as high as 10%, but was reduced around five years ago.
The problem really is that the stamp duty is payable on the basis of the actual sale consideration or the stamp duty ready reckoner value (called circle value in some states), whichever is higher. For each area, there is a ready reckoner, which lists out the value of properties in different areas. The areas for which common rates are prescribed are often so wide and spread out that the differential rates prevailing in different localities of the same area often do not get captured. Unfortunately, the ready reckoner also does not take into account the differentiation in values of properties located in the same areas having different location advantages resulting in different fair values.
While the ready reckoner does recognize the age of buildings and allows suitable reduction in the valuation for older buildings, in practice, the registration office often refuses to accept a higher rate of depreciation for very old properties and insists on a lower rate applicable to newer properties. Actual transactions often may actually take place at a lower valuation on account of various reasons, such as urgency of the seller to realize funds from sale of the property, defects in the title of the property, among others. Therefore, very often, one ends up paying stamp duty on a higher valuation than the actual purchase price, the effective rate of stamp duty therefore being higher than 5%.
The stamp duty ready reckoner rates are revised each year. In spite of the depressed property markets, the government seems to consider revenue considerations as more important than the actual movement in market prices and for the last couple of years, we have seen substantial hike in ready reckoner rates in states such as Maharashtra. The recent statement of the Maharashtra revenue minister that a 10-25% hike in the ready reckoner rates is being proposed for 2013 also underscores the fact that the stamp duty ready reckoner rates are being fixed, not on the basis of movements in market prices, but on the basis of tax consideration, thereby increasing the burden of people seeking to buy houses.
To add to this is the registration charge, which is also now linked to the value of the property purchased, being 1% of the cost of the property. This would also be linked to the actual consideration or the stamp duty valuation, whichever is higher, and the effective rate would, therefore, also be much higher in many cases.
VAT on purchase of immovable properties under construction, levied by state governments such as in Maharashtra, has also been in the news in the past few months. The VAT is currently 1% of the total consideration, though it varied earlier from 1-5%, depending upon the scheme opted for by the builder. It is not only the direct VAT which a purchaser bears. The builder also pays VAT on various materials that he purchases, such as cement, steel, tiles and paint.
This VAT that he pays on his material purchases (generally at 12.5% of the cost of the materials) cannot be set off against the VAT payable on sale of the immovable property at 1%, thereby effectively increasing the cost of the property and ultimately affecting the sale price. Fortunately, VAT does not apply on sale of a completed property and even resale transactions do not attract VAT again.
Service tax is another tax payable on purchase of properties under construction. In most cases, since the sale price includes the proportionate value of the land, the service tax payable would be at 3.09% of the sale consideration of the property. Here, too, the excise duty paid on the raw materials is not available as a set off against the service tax liability and the builder would consider such excise duty as part of his cost while fixing the sale price. Service tax again fortunately is not payable on resale of a house.
Effectively therefore, the tax incidence on purchase of a house under construction would add up to more than 15% of the actual cost of the house. Given the already high rates of immovable properties, such taxes end up adding at least a few lakhs to the cost of the house buyer. Given the unaffordability of housing to common people in India, perhaps it is high time that the government takes a holistic view of the taxes being levied on purchase and construction of houses, and seeks to rationalize such taxes. The government has to realize that these are not taxes on builders, though levied on them, but taxes on house purchasers.
Gautam Nayak is a chartered accountant.