Application of service tax on residential properties to the tune of 10.3% from Thursday, is bound to make homes dearer by 2-3%, say developers and industry experts. The service tax on homes comes at an inopportune time, since the revival in residential real estate is still in its early stages. Such a setback will present yet another stumbling block, they say.
?The implementation of service tax on residential properties will result in a hike in home prices for end consumers. Developers will justifiably be unwilling to absorb this new tax burden and naturally pass it on to the buyers. The increase would be to the tune of 2.58%; this is enough to increase the un-affordability quotient of homes, especially in a city like Mumbai and Delhi, where home buyers are already struggling with the recent spurt in residential property prices,? said Gautam Hora, senior VP, capital markets, Jones Lang LaSalle Meghraj.
In Union budget 2010-11, the finance minister had proposed to implement a service tax of 10.3% on 25% of the total home value, which comes to around 3% of the total home value on under-construction projects. In case of finished projects, the pricing is expectedly higher and there is still no clarity on the same.
This will adversely impact the growth of the industry, analyzing the fact that the service tax imposition on under construction projects will create preference to the secondary market of completed projects. In today?s scenario, developers already pay a service tax of 10.3% to the contractor, thus saying that charging end buyers yet again is foul.
In cities like Pune, Bangalore, Chennai and Hyderabad, where consumers are more price-sensitive, developers will have greater challenges with increasing the prices. Overall demand and sales of residential properties will take a significant hit in all cities.