Big knock for realtors

Leaving more money in the hands of the individual may be positive for the real estate sector, but that may be where the optimism ends for the sector.

The proposals contained in the budget seeks to mop-up significant amounts by way of taxes and duties from the sector, be it residential or commercial projects on the indirect tax front.

In a move that would adversely impact the affordable housing and the residential real estate sector in general, the budget seeks to levy service tax on all transactions between the developers / builders and the buyers, irrespective of the method of contracting, unless the entire consideration for the property is paid after the completion of construction.

For the industry which is faced with intense competition and challenge of declining affordability, the incremental tax costs could result in pricing pressures and could impact margins, especially in cases where the builder / developers are not in a position to pass on the tax burden on the end customers.

On commercial real estate side, there was a debate on applicability of service tax on rentals after the Delhi High Court ruling in the Home Solution Retail India case which strikes down the levy of service tax on commercial rentals holding that only services in relation to renting is taxable and renting per se is not taxed.

This budget proposes to treat the activity of ‘renting’ itself as a taxable service, with retrospective effect from June 1, 2007.
This retrospective amendment is bound to create hardship to the developer community who have sought to take shelter under the Delhi High Court ruling and have not collected service tax from the tenants.

The other significant proposal in the budget is that the land leases are now brought under the purview of service tax.

This could potentially be an important factor in business decisions of long terms leases versus outright purchases.

Whether the levy would also cover pre existing land leases is something for the legal pundits to decide and could be a potential litigation issue, unless the Government comes up with a clarification.

The MAT rate has been increased from the present 15% to 18% leading to a potential increase in cash outflows for certain real estate companies.

Since the proposed Direct Tax Code does not provide for carry forward of MAT credit, this could be a permanent cost.

Although industry always has a long list of expectations and most of them would be disappointed on that measure, to the extent that many of the changes bring certainty and stability, maybe its time to see the gloom in a different light.

—Abhishek Goenka, Partner BMR Advisors