Commercial property, rentals in service tax net 

Residential flats booked and under construction not spared. 

The service tax levy will be an additional burden and project costs will go up by four to five per cent. 

For the realty sector, the Finance Minister appears to have balanced out one sop with an impost. He has imposed the service tax on the real estate sector while extending an additional year of tax holiday for pending projects in the affordable segment.

The Finance Bill levies service tax on construction, office rentals, land lease rentals and, finally, on additional amenities that developers offer over and above the floor price, as also floor rise. The 1994 Finance Act Chapter V of Service Tax has been amended accordingly. The tax on rentals will be with retrospective effect from June 1, 2007.

Mr Pranay Vakil, Chairman, Knight Frank India, said the service tax will be applicable for such amenities and charges above the base rate per sq ft. This will include sea-facing apartments (additional amount charged for the positioning), floor rise and any other facility provided and billed in addition to the bare shell.

End cost to increase

Apartment bookings made in the construction stage will also attract service tax after an initial amount is transacted with the developer.

Mr Kumar Gera, Chairman, Confederation of Real Estate Developers Association of India, said the applicability of service tax to all under-construction flats and homes being booked before completion will increase the end cost and impact significantly the affordability of the home buyer.

Mr Santosh Rungta, President, CREDAI, felt the levy will be an additional burden and project costs will go up by 4-5 per cent. Moreover, indirect taxes on raw materials such as steel and cement will escalate project costs, he said.

Mr Amar Ambani, Vice-President, Research, India Infoline, said there is one major devil in the detail for the real estate sector — service tax has been levied on additional services provided by a builder to buyers, such as preferential location, internal and external development of complexes (except vehicle parking). Further, unless the entire consideration for a property is paid after completion of construction, the construction activity will be charged service tax. Renting of property or renting of vacant land under agreement for construction of a building or other structure will be charged. Service tax will be levied on the construction cost of the built-up area, and how this is going to be calculated and determined is not very clear, Mr Vakil said.

‘Under construction' will not apply to buildings that have obtained completion certificates. In Mumbai, about 90 per cent of buildings have only occupancy certificates, not completion certificates. Lease rent on land will henceforth attract service tax. In Mumbai, the Mumbai Port Trust, the Brihanmumbai Municipal Corporation and the City and Industrial Development Corporation of Maharashtra (CIDCO) have land under lease rent. Rentals collected from these properties will attract the tax, he added.

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