Planning to buy a house? Purchase it before July or be prepared to cough up more. This is because once the 3.3% service tax, as announced in the Union Budget 2010-11, comes into effect on the housing sector from July onwards homes prices are likely to become dearer. Industry leaders opine that cost of property is expected to go up by 5-7%.

General public, too, feel that the finance minister’s proposal in Budget 2010-11 to bring construction under the ambit of service tax will definitely prop up cost of apartments, as reflected in a recent poll conducted by Constructionbiz360, where a whopping 100% answered in the affirmative.

Budget announcements

“Construction activity would attract service tax, unless the entire payment for the building or the complex is made after the resident municipal authority has given the completion certificate,” says finance minister Pranab Mukherjee in his Budget speech. A housing complex is defined as comprising more than 12 residential units.

Moreover, service taxes would also be levied on leased industrial or commercial properties like office rentals, suggested the Budget papers. To add to this, additional amenities—comprising preferential location for apartments in high-rise buildings that developers offer over and above the floor price—have also been defined as services and therefore taxable.

The service tax levied will be 10% on the 33% of the property price. The remaining 67% will not fall under the service tax net. “The imposition of service tax will certainly jack up property prices and discourage potential buyers, consequently impacting the ‘just-reviving’ realty sector, especially the affordable housing segment,” says Ashwini Singh Virk, managing director of Jagson Realtors, a New Delhi-based mid-sized property firm.

Furthermore, Mr Mukherjee’s decision to rule out the rollback of service tax made it very clear to the realtors that the government will not entertain any sort of request for change regarding service tax.

However, proposals such as the extension of the 1% interest subvention scheme till March 31, 2011 and extension of tax holiday for 1 year (from 4 years to 5 years at present) for pending projects have been welcomed by the realty fraternity. 

Going forward, property price appreciation seems imminent, following rise in raw material costs (mainly cement) and hike in interest rate.

Jeeta Bandopadhyay