Budget-2010:Buying under construction flat will attract service tax on payment made before completion of construction

 

Mar 3, 2010

The Budget proposals have thrown up a dampener

for the housing industry.

Construction services have now been brought

under the ambit of the service tax in an unexpected

move that would raise cost of apartments that are

still under construction.

As per the Budget proposal, the finance ministry

has suggested that construction would be deemed

to be a taxable service if the building or complex is

still under construction and approval from the

concerned regulatory authority — which in most

cases is the resident municipal authority — hasn’t

yet been granted. The levy would cover all

construction of complex service or commercial or

industrial construction services, the Finance Bill suggested.

The service tax levy would be 10.3% and would also

apply to additional services such as those offering

preferential locations for flats in multi-storey buildings

where flats in each floor are priced at a premium due

to their location. This too has been described as a

service and hence taxable, according to the proposal

which was tabled in Parliament on Friday

by finance minister Pranab Mukherjee.

The premium is typically levied on categories such as

flats or apartments that are above a certain floor rise

or have other high value locations such as being in front

of a garden or a sea or any other preferred locality.

“The proposal is to tax construction if the entire payment

for the flat is made before completion of construction,”

said consulting firm RSM Astute executive director K H Viswanathan.

“This would increase the cost of the apartment and may discourage

potential buyers.” The service tax would be 10% on 33% of the price

of the apartment, while on the remaining 67%, tax won’t be levied.

Till now, for all apartments under construction, customers

paid in instalments based on plinth level construction and also

on the progress in building activity. Banks too lent money to

the customers according to the requirement of the builder.

Now most developers would ask customers to pay the entire

value of the building if they sought to lock in at a certain value.

This would mean paying the entire sum before the construction.

Typically, in cities such as Mumbai, where there is a pressure

on space and hence apartments and flats are much sought after,

customers booking for flats in an under-construction building, is very common.

“The service tax and excise duty hike on cement would increase the

overall cost of apartment by about 10%,” said Dharmesh Jain,

managing director of Nirmal Lifestyles, a Mumbai-based developer.

“It’s a negative step and we are considering to meet the finance

minister to plead for a relook on this measure,” he added.

But there are other positive measures that the Budget proposes

such as allowing pending projects to be completed within a period of 5 years

instead of 4 years, for claiming deduction of profits, as one time interim relief.

There is also a suggestion that the commercial area included in a housing

project would now be 3% of the aggregate built-up area of the housing

project or 5,000 sq. ft, whichever is higher, compared to the existing limit

of 2% and 2,000 sq.ft. respectively. This would help developers

and real estate companies to make their projects more viable.