No Takers for Service Tax

July 20, 2007	(1 votes, average: 1 out of 5)  Loading ...
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Imposition of service tax on commercial property rentals in Budget 2007-08 envisages widening the service tax net and imposing extra taxes on real estate, even as the real estate developers and tenants believe it is uncalled for. The only silver lining that can be seen is the possible increased transparency in buying and selling properties.

A multitude of developers own a large portfolio of assets, and investors buy property on a fixed return basis. Their returns will drop. Property developers and tenants enter into an agreement wherein any future tax liability will have to borne by the tenant. Most agreements do not include any clause regarding such additional taxes which can lead to disputes and litigation.

Service tax hits individuals who have either already given or taken the premises on rent or those who are planning to do so in future. The service tax has to be borne by the licensor or licensee, a factor which largely depends on the prevailing market conditions.

Several real estate developers are considering seeking legal help. Surprisingly, the government is sending missed signals. Along with encouraging builders to develop more and more infrastructure facilities, it is making input costs higher which will have to be ultimately borne by the consumer. There are a number of factors such as increasing wage bills, expensive development, and rents which are encouraging builders to look forward to develop properties in tier II and tier III cities. There is then a 12.36% service tax.

The impact of the 12.36% service tax means extra operating expenses and squeezing margins, which is to certainly hit the retail sector in India. Other worst sufferers will be multiplexes that will be affected in a big way. Around 8% of their total revenues already go into paying rentals. Adding to woes is entertainment tax, over and above this, the service tax which would be no less than Rs 1.5 or 2 crore.

Rent is a state subject and service tax is levied by the Central Government at 12.36%, which is extremely high. Real estate prices are increasingly going up and it is no more practical for developers to do business in many places.

Any such move will only serve to make things worst for the developers as more properties are under construction and they have to bring down their margins, as otherwise, they will hardly find any retailer to take it up at extra costs. Although real estate in India is fast flourishing but it is still a ‘baby’ if compared with property market of the US or China. Any stringent rule can put strains on this upcoming sector.

Imposition of service tax may inflate property prices further which do not make any sense in today’s scenario where the rates are already going through the roof. Instead, the government should focus their attention towards the means to bring a reduction in the property prices or at least try to sustain them at the existing levels.

News Published Under:   Real Estate Trends |