Service tax on luxury houses increased

The real estate in India is at a crucial phase at present. While the real estate has been growing at a hurricane pace in the last decade or so, recent slump has put clouds of doubts hovering over the high rises of India.

Sales have been dropping and the contribution of real estate to the economy has also slumped from 10.6% in 2011 to 6.5% in 2012. Unsold homes have been a serious issue blackening the fortunes of realty sector and the slow performing economy has made the situation even worse. Although recent rate cut has been welcomed by the realty players, the changes in Service Tax Act have made it more expensive to own a home.

The luxury segment has been on the receiving end of the changes made in the Service Tax Act. Although real estate had expressed lofty expectations from budget 2013, it failed to conjure up magic for the sector. Worse rather, the budget has provisions for reducing abatement rates for luxury apartments.

As per the budget 2013, rate for abatement on apartments costing more than Rs 1 crore or apartments with size of more than 2000 sq ft has been reduced by 5%. Earlier, the abatement rate stood at 75%. However, as per the budget provisions the abatement rate has been reduced to 70%. It means that whereas earlier one had to pay service tax on 25% of the cost of a house, now he/she has to pay service tax on 30% of the cost of an apartment.

The real estate sector will have to bear the brunt of increased service tax outflow. The net service tax outflow is estimated at 0.8%. Earlier, the developers had to pay a service tax of around 12.5% on 25% of the value of an apartment; now they would have to pay the service tax on 30% of the value. It means that from the erstwhile 3.09% service tax rate, it has gone up to 3.7% of the property value. The increase in service tax will not be applicable in case of low cost housing.

The increase in service tax liability will result in rise in property cost in case of luxury housing. Service tax is payable by developers on sale of flats before the completion of construction work. Apart from constructing the apartment, the builder renders many other special services, too.

Here are some of these special services rendered by the builder:

Preferential location: Extra payment is levied by the developer on a home buyer if the project comes with a special location attraction.

Development charges: Internal as well as external development charges are charged by the developer for maintaining parks, sewage system, common lighting in the complex, etc.

Miscellaneous charges: Nowadays developers levy charges for firefighting installation, backup power and so on.

However, all the above mentioned charges are excluded from taxable value on construction. The new service tax excludes certain services provided by the builder – providing car parking, development charges paid to the state government and any service provided by cooperative housing society or resident welfare association.

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