Budget blow to home buyers

Prospective home buyers must brace for at least a 3.5 per cent rise in prices as the government has slapped a service tax on property sales in the recent budget.

Realty mavens said the tax blow could be a lot worse because of a cascade effect that the proposed tax would have.

Finance minister Pranab Mukherjee also plans to impose the tax on the extra money that buyers pay for a preferential location within a building and other amenities such as club memberships.

Pradeep Sureka, a city-based developer and local head of realty body Credai, said the specific proviso of service tax on under-construction property would translate into a 3.5 per cent rise in overall prices, excluding preferential location or extra facilities.

The thumb rule for the calculation is that in any property transaction, two-thirds of the sale value relate to goods (construction material, land cost etc), while the rest is for services (money paid to contractors etc). Hence, the developer will pay service tax on one-third of the sale value and realise the same from buyers.

Santosh Rungta, president of Credai, said developers wrote to Mukherjee yesterday demanding a rollback of the duty.

Builders say real estate transactions are bound by the Transfer of Property Act, and buyers are paying stamp duty under the act. So, the same transaction cannot be considered as providing service.

However, this is just one part of the story. The devil is in the detail of the Finance Bill and may force developers to change the pricing structure, resulting in the buyer having to pay more.

Here is how it may happen.

Mukherjee plans to tax the charges that a developer seeks for a preferential location within a complex. Buyers pay a premium for a better location (say a flat facing south east) — or elevation (15th floor instead of the first floor). Developers seek a minimum Rs 10 to Rs 25 per square foot extra for every floor rise.

However, the premium is never clarified in as many words in the sale deed.

Kaustav Ray, executive director of Cushman & Wakefield, said the tax authorities might ask why developers were seeking differential rates for flats. “If it is based on the preferential location, buyers may have to pay 10.3 per cent on the entire premium amount over the base price,” he added.

Moreover, charges paid on internal or external developments that come at an extra cost like a club facility will be taxed, too. Mukherjee has, however, left out car parking charge from this ambit.