Builders cry foul play as Govt imposes service tax

Finally the builders are getting the short end of the stick, the same stick they have used when they hiked prices indiscriminately every week. The best line is from Niranjan Hiranandani who shedding crocodile tears for affordable housing.

"The budget proposals are death knell for the affordable housing in the country. If housing will be taxed so heavily, how can you expect us to build homes. There is no other option before us than going to the government and ask for roll back," said Niranjan Hiranandani, managing director of Hiranandani Constructions.

Now Mr Hiranandani has never built homes for the middle class and prices in Hiranandani Powai are upwards of 18,000 per sq ft. If they don't like the proposals I would urge all the builders to quit this business and leave it to the individuals to build their own houses

Withdraw move on service tax, say developers

Raghavendra Kamath / Mumbai February 28, 2010, :01 IST

Stung by new service tax proposals on property transactions, real estate bodies such as CREDAI (Confederation of Real Estate Developers Associations of India) and Maharashtra Chamber of Housing and Industry (MCHI) are planning to approach the finance ministry to seek a rollback of some of the proposals.

The government yesterday brought transactions such as leasing vacant land and commercial spaces, payment made to developers before the grant of completion certificate and imposing preferred location charges among others under service tax net.

The transactions now attract a service tax of 10.3 per cent. Developers complain that levying service tax on payments during construction will push up prices and reduce home sales.

The proposal, according to developers, could push up prices by 10 per cent in Tier-II and Tier-III towns and 0.5-4 per cent in big cities, which have higher land prices. Service tax is calculated on construction cost.

For instance, in South Mumbai, where apartments are priced at Rs 35,000 per square feet, the effective tax burden will be 0.5 per cent (10.3 per cent on construction cost Rs 2,000 per sq ft). A house of 1,000 sq ft will attract a tax of Rs 175,000.

But in Umargaon, which is around three-hour drive from Mumbai, where apartment prices are around Rs 1,200 per sq ft, the service tax burden will be 7.25 per cent (on construction cost of Rs 900 per sq ft).

Developers have already increased prices by 15-20 per cent in the last nine months as demand for homes pick up. This has resulted in demand tampering off in the last two months.

"Either prices have to correct now or developers have to pass on the burden to buyers. I think the second option is most likely to happen. If that happens, home sales will certainly go down," Krishnan, partner, real estate practice, Ernst & Young.

Adds Kumar Gera, chairman of CREDAI and Gera Developments: "It is a burden on buyers and not on developers. Anything that increases prices reduces affordability. If developers have margins, they will absorb it, otherwise they can\'t." "We will approach the government to reconsider the proposal."

Krishnan said that by levying new service tax, the government had sent out a signal to the developers to reduce prices and clear their inventory.

Developers said the increase in excise duty on cement and steel, the key ingredients in construction, is also likely to see increase in prices. Excise duty on cement and steel have gone up by 2 per cent. Cement prices are likely to go up by around Rs 8-10 a bag of 50 kg, while the prices of steel are likely to increase by around Rs 600 a tonne.

"The budget proposals are death knell for the affordable housing in the country. If housing will be taxed so heavily, how can you expect us to build homes. There is no other option before us than going to the government and ask for roll back," said Niranjan Hiranandani, managing director of Hiranandani Constructions.

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Flat buyers exempt from service tax

What happens to people who have already paid service tax ? Will that tax be refunded by the builders to the buyers ? As usual the order is incomplete and ambigous. Kudos to the tax board.

DNAIndia reports.

Mumbai: The Central Board of Excise and Customs (CBEC) has made it clear that flat buyers, developers and builders are not liable to pay service tax.

In a circular (F.No.137/12/2006- CX.4) issued on January 29, the board has said that generally, the initial agreement between the developer (promoter/builder) and the buyer is an "agreement to sell". As per provisions of the Transfer of Property Act, this does not "create any interest in or charge on such property".

It is only after the construction is completed and the agreed sum is paid that a sale deed is executed, transferring the ownership of the property from the builder/developer to the buyer, the board has said.

Any service provided by the developer during the construction of a residential complex -- before the execution of the sale deed -- would be "self-service" and, consequently, not attract service tax, the board has clarified.

If the buyer enters into a contract for construction of a residential complex for personal use with a developer (promoter/builder), who provides design, planning and construction, then such an arrangement would also not invite service tax.

Flat buyers don't need to pay service tax
It is excluded from service tax under the definition of "residential complex", the board has said.

However, in both these situations, if services of a contractor, designer or a similar service provider are taken, then such persons would be liable to pay service tax, the circular says.

The board has clarified that the builder is not a service provider and, hence, not liable to collect service tax. But contractors or designers engaged by the builder should charge service tax from him.

The Authority for Advance Ruling had in the case of Hare Krishna Developers ruled that the builder/developer was liable to pay service tax.

But in the case of Magus Construction Pvt Ltd, the Gauhati high court had ruled that the builder/developer was not liable to service tax.

The two conflicting judgments had created confusion, which the CBEC circular has now put to rest.

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BMC plans ot hike property taxes

Finally property dealers are acknowledging that property prices are beyond reach in Mumbai along with the fact that there are too many apartments for sale with no buyers at these prices.

The BMC’s proposal on property tax would be detrimental to the market, says Sandeep Sadh

After the inflation jumping to 7.57%, Mumbai, the financial hub and the dream city for many is in for a rude shock. The BMC plans to get stringent about collecting property tax upto 83.5% on residential properties and 112.5% on commercial properties which, after rebate of 40 to 60%, becomes nearly 30% of your rental income. As per the recent news this is payable every six months by the property owner.
The BMC has taken the twodecade-old formula of accounting for taxation this time around and the simple logic given so far is that they are going by the book, even if the book is 20 years old.
While implementing these policies the BMC must look at the general interest of the public and consult professionals in this regard.
This will add to the burden of higher taxation, inflation, crumbling infrastructure, spiralling property prices and high interest rates. There will be a lesser yield on investment and property transactions done purely from an investment perspective.
Mumbai being the financial capital of India, and the fastest growing city in Asia has an inflow of both local Indians and expatriates who typically come to work in Mumbai for a short span of two to three years.
They are looking for rented accommodation and sign up a leave and license agreement for any period between one to three years generally.
With BMC now planning to impose nearly a three-month rent as tax to the owners per year, the rents will go up by nearly 30%, which is totally absurd.
This is an excerpt of a recent article, which says, "Rentals at many places in the city have gone up by 100% to 200%, and yet we don't get our share of that profit."
Why should the BMC be given a share of profit? Firstly, it is the investors or property owners' hard-earned money and they have the right to make profit and they are paying income tax.
These are policies which are already two decades old and based on the old rent system.
Why cannot an intelligent system be brought in, which should be based on keeping taxes both the licensor and the licensee are already paying?
The BMC policies are already known to be notorious for taxing year on year even if the property is not rented. There is no rationalisation on the taxation.
I was speaking to a Consulate General and they have called off a transaction for a residential property as the owners wanted to place the onus of taxation on the Consulate.
The Consulate General said that this kind of irrational taxation will be bad for Mumbai's reputation as companies who will want to relocate their expatriates will find it difficult to pay such higher taxation.
He added, "Nowhere in the world is taking an apartment on lease such a task and with such higher prices and taxation it is a problem."
They are already thinking of shrinking the size of expatriates.
The city is anyway ill-maintained. With crumbling infrastructure and visionless policies the BMC is placing itself into a one-sided high- handed body to only collect money and have proportionately less accountability and contribution to the city's welfare.
Mumbai is already one of the most expensive cities in the world to live in and to place on record the seventh most filthy city as well, it is thanks to the BMC. How do you expect people to pay such high rentals to survive after taxing them and what do they get in return?
What happens to the tax if lease agreements are terminated mid-term? With higher taxes more and more people will opt out of Mumbai and find out ways and means to circumvent taxes and therefore increase corruption.
The BMC and the government should find out ways and means and take more and more property owners and individuals and companies renting out properties in confidence before announcing such policies.
The BMC is looking for revenue but what it does not realise is that it cannot be done at the cost of individuals who spend their hard-earned money to invest in properties only to lease out for income and they are already paying all sorts of taxes to do so.
The annual return on investment on residential properties has already gone to 4% owning to higher property prices in the city.
Not each location gets a great rental value and with extra tax liability the government is only looking at closing the doors for the investors who are looking to invest in real estate.
If there are no returns in the property market why should investors look at buying it? This will impact the sale of properties and all mutual funds, REITs and other real estate related transactions will also be impacted. This in turn will also impact the property market dramatically.
In the past three years, the rental values in Mumbai have gone drastically higher ranging from 30% to 200%.
Many people started buying their own apartments as the rental values would be nearly 50% of their EMI.
Inventories in Mumbai are already building up, there are more and more apartments vacant and a lot of property owners are willing to give 10% to 25% discount on quoted prices due to a little slow down.
The scare of huge taxation will also impact this further as none of the licensors / licensee will want to be a part of any further hike or taxation.
Earlier, the tussle used to be between the licensor and the licensee to get a deal done; now both will have to unite and find ways to fight out with the BMC.
Highlighted below are the taxes which both the licensor and the licensee pay in any case for renting out properties, besides other expenses like maintaining the properties, painting, polishing, annual maintenance contracts, furnishings, paying VAT etc on all household goods, service taxes on labour and so on.
Fringe Benefit Tax payable by the employee in case of a company lease - 20%
Service Tax - Presently only on commercial property - 12.36%
Property tax on leasing/licensing (more in commercial property)
Stamp Duty and registration fees
Income Tax
Society outgoings/non - occupancy charges paid by the owners
Municipal taxes on property in general.
This typically means, that the BMC wants to penalise the investors who invest in real estate.

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