Realty developers not pleased at many Budget details

Raghavendra Kamath & Kalpana Pathak / Mumbai March 6, 2010, 0:47 IST

The devil is in the detail for the real estate sector.

Though the Budget gave sops to home buyers in the form

of tax savings and interest rate subvention, it quietly 

brought back service tax on lease rentals in the Finance Bill.


Builders said they’d pass on the service tax burden to
customers. The silver lining was that the continuation
of interest rate subvention and higher disposable income
in the hands of individuals through income tax reliefs
would more than make up for it.

The Budget announced a maximum tax savings of Rs 20,000
for those earning an annual income up to Rs 5 lakh and up
to Rs 50,000 for those earning up to Rs 8 lakh.
This additional income is likely to find its way towards buying homes.

Says Aashiesh Agarwaal, research analyst at Edelweiss
Capital: “For people getting an annual income of Rs 8 lakh, there will be a saving of 10 per cent, which will increase disposable income and their affordability. This will mean they can pay a higher EMI and be eligible for loans of higher value.’’

This Budget also extended the interest rate subvention
on a housing loan up to Rs 10 lakh where the house price
is up to Rs 20 lakh, announced in the earlier Budget, to
March 31, 2011. But, many developers are unimpressed.
“Overall, home sales may go up, but there is no incentive fo
developers to launch more affordable housing projects.
Why should we?’’ said Niranjan Hiranandani, managing director
of Hiranandani Constructions.

SERVICE TAX WORRY
The biggest worry of developers is re-introduction of service
taxes. In April 2009, the Delhi High Court stayed the tax on
lease rents when some retailers approached it, opposing the
government move to impose it. According to the Finance Bill,
service tax would be levied for renting immovable property or
any other service to such renting with retrospective effect from
June 1, 2007. The service tax rate is 10 per cent now.

Buildings under construction and the leasing of vacant land
would also attract service tax, the Bill says.

“The levy of service tax will increase the price of properties.
This has come as a dampener, as even renting under-construction
property will attract service tax now,’’ says Jai Mavani, executive
director and head of the real estate practice at KPMG.

Some developers are unmoved.
“We will transfer the service tax to home
buyers and to that effect there will not be
any additional liability,’’ said Sarang Wadhawan,
managing director of HDIL, a Mumbai-based developer.

OTHER SPURS
Though the Budget allowed projects started
before March 31, 2008, to be completed within
five years instead of four for claiming deduction
of their profits as “one-time relief to the sector’’,
developers and consultants said the measure does not help much.

“It is unfortunate that the commencement date of March 31, 2008,
has not been extended but the period for implementation
has been extended by one year. Hence, the impact of the
amendment would be marginal,’’

said Pranay Vakil, chairman of Knight Frank India,
an international property consultant.

However, the hotel industry gave a thumbs-up to the finance
minister’s move to give investment-linked deduction to new
hotels in two-star or above categories.

The benefit was hitherto available to certain states such as
Uttarakhand and Himachal Pradesh; it has been extended to all.

It allows 100 per cent deduction in respect of the whole of any
expenditure of a capital nature (other than on land, goodwill and financial instruments).

“It’s a good measure that will boost investment in the tourism
sector, with high employment potential. Also, the fact that the
benefit is made available to hotels across the board will boost
investment in all categories,” said a Delhi-based analyst.