INCREASED SERVICE TAX TO DENT REAL ESTATE SECTOR

Finance Minister, Arun Jaitley had announced changes in the service tax structure in the Budget 2015 - 16. The new service tax would now be applicable commencing 1st June, 2015. Recently, the finance minister declared that the new Service Tax Rate would be increased to 14% from the existing 12.36% with effect from 1st June onwards. In his budget speech, Jaitley had said that to facilitate a smooth transition to levy tax on services by both the centre and the states, “it is proposed to increase the present rate” of service tax plus education cess from 12.36% to a consolidated rate of 14%.

     Service tax is imposed on all the services except a few. Insurance, phone bills, restaurant bills, advertising, tour operators, air travel, credit cards, several construction elements, event management, architecture services are few among many to attract tax. This escalation in service tax rates would also have direct impact on realty sector and buyers would now have to shell out extra money to buy their dream homes; though marginally. The construction cost will go up as there would be increase in the prices of raw materials and other service related activities; as a result, prices will shoot up for under construction properties. Service tax is imposed on all the services as in the case of under construction property the developer is deemed to provide construction services to the home buyer. The cost of land is not included while calculating service tax, instead it is charged on the cost of construction. For the purpose of calculating service tax on property less than 1 crore of value, 25% of the service tax of the base price of the said under construction property is taken and service tax is applied on this. In case of property of more than 1 crore of value, service tax is applied on 30% of the service tax of the base price of that under construction property.

     At present, the effective rate on the entire value of a property below Rs.1 crore is 3.09% (25% of 12.36% of property value) and for a property above Rs.1 crore, the effective rate on the entire value of the property is 3.71% (30% of 12.36% of property value). It will become 3.50% (25% of 14% of property value) for properties valued below Rs.1 crore and 4.2% (30% of 14% of property value) for properties above Rs.1 crore.  Increase in service tax will also have effect on other costs such as legal fee, property valuers, property agents, home insurance, bank loan rates etc.

  Below is a table as an example to show the effect of increase in service tax from 12.36% to 14% on different basic selling prices (BSP). The table shows the amount of present as well as increased service tax and the difference in amount of both the figures. Below figures are different basic prices which do not include other variable costs such as car parking, preferential location charge (PLC), club membership, legal fees, home insurance, shifting charges etc. These costs are also paid by the home buyers as additional facilities. There are certain charges such as maintenance and internal development charges which are exempt from service tax.

Effect  Of Increased Service Tax:

Basic Selling Price	Existing Service Tax Rate	Existing Amount	Proposed Service Tax Rate	New Amount	Difference
25 lakhs	3.09 %	77,250	3.50 %	87,500	10,250
50 lakhs	3.09 %	1,54.500	3.50 %	1,75,000	20,500
75 lakhs	3.09 %	2,31,750	3.50 %	2,62,500	30,750
1 crore	3.09 %	3,09,000	3.50 %	3,50,000	41,000
1.5 crores	3.71	5,56,500	4.20 %	6,30,000	73,500
2 crores	3.71	7,42,000	4.20 %	8,40,000	98,000

    

The increase in service tax will however not affect those who have already got the possession or it’s a ready-to-move-in property or if the project has been given a completion certificate. On the other hand, home buyers who are planning to buy or invest in under construction property will have to bear the additional service tax along with those who have booked an under construction unit. Although, the increase in service tax rate is effecting within a range of 10 thousand to 1 lakh for properties ranging from 25 lakhs to 2 crores; it will make the buyers pull out additional amount. The macro problem can cause the equation to get much worse here, as almost everything gets affected by increase in service tax. Therefore, after spending extra in bits on everything; the overall purchasing power of a customer gets affected which might pull them back to buy a property.

   Mr. Deepak Kapoor, President CREDAI Western U.P & Director, Gulshan Homz, says “The government’s decision to hike service tax rate is definitely going to put some extra monetary burden on the buyers. Real estate in our country is witnessing a lot of construction which will now see a dent in the buyer’s demand, but marginally. Customers will now have to spend extra to buy their homes as they’ll be also paying extra in every service that they receive”.

    Mr. Mahipal Singh Raghav, CMD, MMR Group, says “The increase in service tax will definitely increase the overall cost of buying a property. This will create extra pressure on the pockets of buyers who otherwise are already being affected by rising property prices. We are expecting the demand to move down a little post June this year”.

   Mr. Vikas Bhasin, MD, Saya Homes, says, “A hike in service tax from 12.36 percent to 14 percent will lead to increase in the prices of under construction properties. The decision was out during the budget itself and it was just a matter of time when it is made applicable. From June onwards, the demand will surely get negatively affected as it will be hard for customers to bear the extra burden of incremental value”.

   Mr. Prithvi Raj Kasana, MD, Morpheus Group, said, “Property prices will rise to some extent and this would make properties costlier to buyers. Construction services and other costs are also included in the tax as a result of which there would be a hike in property prices. The bigger problem is that this is not pertaining only to this sector as the overall purchasing power of a customer gets affected”.

   Mr. Rupesh Gupta, Director, JM Housing, said, “The effect of increase in service tax will not just be on the basic selling price but other charges as well such as PLC, club membership, legal fees, insurance etc. which is variable in nature; will also have increased service tax rates now. This incremental value will increase the overall price of the unit which will be borne by the customer only”.

SOURCE: http://iccpl.blogspot.in/2015/05/increased-service-tax-to-dent.html