Housing sector unlikely to take service tax hit

The impact of the 10.2 per cent service tax on housing projects that are bigger than 12 dwellings is likely to be much less than what was thought of, say tax and real estate experts. The tax comes into effect on June 16.

They say the lesser impact will be because of the exemptions allowed under the Cenvat scheme and the stiff competition among builders that prevent them from passing on the extra cost to the buyer.

Builders and developers can calculate service tax in two ways. They can segregate the material and service components of the total cost. The builder can pay service tax on the service component (labour, engineering, landscaping, architects) and avail credit on Cenvat (excise duties) paid on material inputs (cement, steel, bricks) in construction.

Or, if a builder does not have the records of Cenvat paid, he can then pay 10 per cent tax on only 33 per cent of the gross sale value, without having to separate the service and material components.

"The effective tax will only be around 3.5 per cent on the gross cost of an apartment," says tax consultant RN Lakhotia. Thus, a flat that costs Rs 20 lakh may cost about Rs 70,000 more.

It is up to builders to pass on the increased cost to customers or bear it. But the competition may not allow them much flexibility.

"Owing to stiff competition, some builders may decide not to increase the prices at all," says RR Singh, director-general, National Real Estate Development Council.

Developers with high profit margins may refrain from increasing the prices further. Kunal Banerji, senior vice-president (sales & marketing ), Omaxe Construction Ltd, says, "We will not pass on the cost to our customers as our margins are high enough to absorb the increase."

Parsvnath Developers Ltd may increase the prices marginally."We may hike the prices by 1 or 1.5 per cent, although we still have to take a decision on this," says Sunit Sachar, vice-president , marketing.

On the other hand, the Vatika Group is looking at increasing the prices by 4-5 per cent.

"We are yet to calculate the overall increase," says Gaurav Bhalla, executive director.

No service tax is applicable to housing projects with less than 12 units, irrespective of their size and cost.

Real estate developers have termed the tax as being against the basic need of housing.