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Affordable housing was left out service tax exemption

The Finance Minister’s recent move to reduce service tax has not brought much cheer for real estate players who say the tax should have not been imposed in the first place. “Service tax on residential property is one more tax which should not be levied on housing. You are already paying a stamp duty, so many duties on all the construction materials and there is provident fund for labour. So you did not need one more tax. This reduction in tax which has come is not a reduction, it is a new tax which is unnecessarily put on residential property,” said Nirajan Hiranandani, MD, Hiranandani Group.
The government announced that service tax would now be levied on 25% of the total value of property as against the current 33%, besides increasing the abatement provided to the sector from current 67% to 75%. Finance Minister Pranab Mukherjee said the construction sector had requested for a review of the changes in the service tax law proposed in this year’s Budget.

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“Considering all the inputs, I propose to provide tax relief to this sector by enhancing their rate of abatement from 67% to 75% of the gross value where such value includes the value of the land constructed upon,” he said in the Parliament.
However, real estate players feel such move will have very minimal affects on the pricing of house which has already gone up due to increase in construction cost. “The marginal reduction in service tax extended to housing construction projects on 25% of the cost although sympathetic in spirit, shall nevertheless add to the cost of housing by nearly 2.6%,” said Rohtas Goel, President, National Real Estate Development Council (NAREDCO).
He said the expected increase in cost of housing loans following the RBI monetary policy 2010-11; the increase in VAT by 2% on cost of construction inputs; and the increase in pricing of steel and cement during recent months shall together force real estate industry to pass on additional cost of construction to home buyers. “The cost of housing projects shall increase by at least 5% on account of this cumulative impact of policy changes and tax increase,” he added.
The Confederation of Real Estate Developers’ Associations of India (CREDAI) also feel the method of calculation is unjust as land, the biggest component in the cost of a residential unit, should not be taxed as service. “In the present proposal, the abatement given (where cost of land is included in the price of the apartment) will be unjust. This process will lead to complications and also pose difficulties for the buyers in understanding how and what they are being taxed for,” said Kumar Gera, Chairman, CREDAI.
He said the applicability of the tax on projects that are under construction currently is also a matter which requires clarity. “Home buyers as well as developers at the moment are not sure if they will be taxed fully or partially for bookings already made on under construction projects,” he added.
The government, however, has exempted low-cost housing from paying service tax. “With a view to give thrust to the low cost housing schemes for the urban poor, I propose to exempt service tax on constructions under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and under Rajiv Awas Yojna,” Mukherjee said.
But, developers feel there are not many slum rehabilitation programmes all over the country and the affordable housing should have been exempted. “That is a whitewash. They have given it for slum schemes. It is insignificant. The whole country does not have slum schemes. So majority of people are buying regular houses. Even the affordable houses have also been covered under the service tax which is quite sad,” said Hiranandani.

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