The Union Budget 2010-11 is a big disappointment to the middle-class urban housing sector. However, it has bet on the economic growth to drive demand in the sector. By tweaking the income slab, finance minister Pranab Mukherjee has put some extra money into the pocket of middle-class tax payers. A person having an income of Rs 5 lakh per annum is likely to gain Rs 20,600 per annum from the provision. But, if his income is more than Rs 8 lakh, his annual gains will be around Rs 51,500. These are a big booster to the economy as they will increase the purchasing capacity of individuals. Ultimately, tax saving is equivalent to money earned.
Service tax on apartments under construction.
But at the same time, the finance minister has imposed service taxes on a number of services related to the real estate sector. Anshuman Magzine, MD of global consultancy firm CBRE Asia, says that these provisions will be a dampener and affect the revival of the real estate sector. Another realty consultancy firm, Knight Frank, also said that it would affect the sector adversely.
According to a budget provision, in cases where a property under construction is bought and a consumer makes payment over a period of time, then it will attract service tax. “In the ‘Construction of complex service’, it is being provided that unless the entire consideration for the property is paid after the completion of construction (that is, after receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly,” reads the provision.
A senior tax consultant of KPMG says that this clearly means that if a house or apartment is sold before the completion of the construction, a buyer will have to pay the service tax. In fact, Sunil Mitra, revenue secretary, said that even if a house is already sold but the completion certificate could be secured from the concerned authority in 2010-11 or after March 31, 2010, the service tax would be levied on such transaction. According to tax experts, this will lead to a tax outgo of 3.4% of the sale value of the house. Mitra also confirmed that the department would allow an abatement of 67% on the value of house to calculate the service tax at the rate of 10.3%.
This means, if you have bought a house for Rs 50 lakh at the time of launch of a project, your tax liability would be Rs 1.70 lakh. However, with the service tax levied from service provider, a senior builder said they would pass on the liability to the customer. He said that since they have started launching affordable apartments, the margin is so thin that they would not be able to absorb them.
The budget has also included the renting of immovable property under the service tax net. Knight Frank says that this will have a negative impact on the real estate sector. The levy of service tax will impact rented commercial property with retrospective effect from June 1, 2007. Even in cases where a developer takes land on lease and pays lease rent, the lease rent will attract service tax.
Preferred location will be taxed
Interestingly, the differential charges for higher floor, or for preferential view, better spaces, etc will also attract service tax. “Certain additional services provided by a builder to prospective buyers like providing preferential location or external or internal development of complexes on extra charges. However, service of providing vehicle-parking space would not be subjected to tax,” the new provision says. However, there are some positive aspects also, which will benefit the construction sector as a whole.
Hotel industry gets a boost
According to a new provision, all new hotels of 2-star and above category will be benefited because of the investment-linked deduction – 100% of the capital expenditure incurred by a hotel can be reduced from taxable income. This will enhance the returns for developers of hotel projects, says Knight Frank. “The provision will enable investments in the hospitality segment and boost supply in the organized sector. It aims to provide support to the hospitality sector in expectation of growth in tourism and both business and leisure travel,” says Anurag Mathur, MD of Cushman & Wakefield India.
Relief under 80 IB
The budget has also given relief to developers under Section 80 IB (10). It has provided the extension of income tax exemption for housing projects by one year. It will give a relief to projects that were delayed during the slump. These projects should have been sanctioned on or before March 31, 2008 and be completed in five years. Similarly, the provision for commercial establishments has been increased from 5% or 2,000 sq ft of built-up area, whichever is less, to 3% or 5,000 sq ft of built-up area, whichever is higher. Therefore, at least 5,000 sq ft of shop establishments can now be developed in these projects while continuing to remain eligible for income tax exemption, says Knight Frank.
The relief to developers by allowing extension for claiming deduction of their profits within a period of five years under the section, says Mathur, would help those developers who were impacted by the global financial crisis last year. This announcement is likely to provide a breather for developers who were finding it difficult to complete projects due to liquidity crunch.
However, on the other hand, the announcement may be a cause of concern for the consumer/end user as relief extended to developers might result in further delay in project completion. In addition, it is suggested that the norms for built-up area of shops and other commercial establishment in housing projects will be relaxed to enable basic facilities for the residents.
Interest rate subvention
Interest rate subvention of 1% will continue to benefit individuals borrowing up to Rs 10,00,000 for residential property costing not over Rs 20,00,000 for one more year, and this will continue to help affordable housing. Mathur said that the continuation of the interest rate subvention on loans for low-cost housing would further provide a stimulus to the demand for low-cost housing. However, the real positive impact of this measure would be experienced only in peripheral locations of Tier 1 cities and in Tier 2 and 3 locations.
Higher allocation for Rajiv Awas Yojana and Indira Awas Yojana will benefit residential sectors aimed at economically weaker and LIG segment in both urban and rural centers, says Knight Frank. Increased allocation under schemes like Rajiv Awas Yojana, Bharat Nirman, Indira Awas Yojana, amongst others, is expected to reduce the demand to supply gap for low-cost housing and is also expected to provide increased opportunity for developers to participate in government led projects, Mathur said.
Another positive aspect in the budget for the real estate sector is the impetus to SEZs, which will be beneficial and have a cascading impact on the sector by way of development of satellite townships and cities.
