Service tax on utilities bites realty

Lessors of commercial property should now exclude utilities from their rent to save money as the Budget has proposed levy of service tax on services relating to renting of immovable property, other than residential and vacant land, for business or commerce.

"Net lease does not include utilities like electricity and water. To avoid paying service tax on all that, it is better to pay directly to the utility boards," said Satya Poddar, partner, Ernst & Young.

The move will affect traders, retailers and export-oriented offices like BPOs the most. "As they have no other service tax liabilities, it is not possible for them to offset the 12.36 per cent service tax (including the education cess) that will be levied on the rent," said Poddar.

Retailers will increase prices as they have no option but to pass on this additional tax to the customer. "While accommodation in hotels has been excluded, commercial renting in hotels will attract service tax," said R Sekar, joint secretary, Ministry of Finance. This means that hotels leasing out shops and business centres will have to pay service tax.

Property experts say this could not have come at a worse time. Commercial property prices peaked last year on account of high demand and inadequate supply. The sealing drive undertaken by the Municipal Corporation of Delhi led to further escalation of rentals in and around the capital.

The finance minister has also decided to levy service tax on works contract as an additional service category with an optional composition scheme under which service tax will be levied at 2 per cent of the total value of the works contract. "We will come out with guidelines to determine the service value in of particular transactions," said Sekar.

"According to the central composition scheme for service tax, the Centre levies tax on labour, which is taken as one-third of the total cost. Yesterday's announcement on works contract tax effectively brings down the rate by 2 per cent. But there is no clarity on which of the two rates will be applicable," said Poddar.

The good news for the real estate sector comes in the form of reverse mortgage scheme for senior citizens.

This allows senior citizens to mortgage the house they are living in to a bank and earn cash in the form of equated monthly instalments (EMIs). Industry experts have also welcomed the scheme for mortgage guarantees. While the exact policy for this is still to be framed, this is how it might work: A person can pay a fee to a guarantor, who in turn guarantees the mortgage to the bank.

"A mortgage guarantor reduces the risk of the lender. As banks spend too much time assessing risks, this can help in speeding up the process. If a mortgage is not too risky, it can even help in reducing the lending rate," said Sanjay Verma, executive managing director-south Asia, Cushman&Wakefield.