Blow to Construction of residential Sector:
Unfortunately the union budget has treated the
construction sector badly. The union budget has included the some additional
services in the service tax net; like site formation, demolition, and like
services of survey of land and making maps, construction of planned residential
completes with more than 12 dwelling units developed by the builder. The
service tax is 10% with 2% education cess. Thus the effective tax would be
10.20%.
Not a Burden to Builder:
The service tax will be collected by the service provider, that is builder. But he will pass on the tax component to the
purchaser of residential units, thus it is the end user who will ultimately
suffers.
Apart from passing the service tax component to the
purchaser, the builder enjoys certain tax exemptions on full profits earned in
developing and building housing projects under section 80-IB of Income Tax Act.
The exemptions are allowed subject to certain conditions, such as
- The project should have a plot area of minimum one acre.
- Residential
unit should have maximum built up area of 1000 sft in Delhi, Mumbai and
1500 sqft in other areas.
- The built up area for commercial and shopping should not exceed 5% or 2000 sqft
whichever is less.
- The
project should have approved before 31 March 2007 and should be completed
within four years from the end of the financial year in which project was
approved.
Further minimum plot area requirement of one acre is
waived in case of housing projects carried out in accordance with the schemes
framed by central or state governments for reconstruction of or redevelopment
of existing buildings and notified by the board in this behalf for
redevelopment of such dwellings. The exemption is allowed for five years on 100% profits. Thus on compliance of certain conditions builder need not pay any
income tax on the profits earned on construction of dwelling units; and passes
on the service tax to the purchasers. So levy of service tax on flats is not a
burden to the builder who coolly pockets the profits, which are exempted from
income tax.
Purchaser will suffer:
The ultimate man who has to bear all the
load is the end user, who at most times might have spent all his life time
earnings to have a roof over his head. Not only the service tax, but other
decisions of government has exposed the purchaser to higher expenditure.
The Cabinet Committee on Economic Affairs has recently decided to allow 100% foreign direct investment in construction
sector; where the minimum area to be developed is 25 acres (10 hectares) in
case of serviced housing plots. Already owing to various restrictions on
approval of layouts, prohibition on betterment charges in the city/town
municipal areas the price of lands have increased by 50% in the last six months
around the city. With allowance of 100% FDI in construction sector, the price
of the land will further increase around Bangalore.
25% Duties:
In certain cases old structures have to be demolished.The lands have to be surveyed and mapped.The builder starts construction of multi-storied apartment after approval of plan. Many times each of the above
activities are done by different agencies and each activity attracts services
tax of 10% and education cess of 2%.The budget has proposed to exempt service
providers whose gross annual turnover does not exceed 4 lakhs, but this
exemption is a pittance for construction sector.
Seldom a builder/promoter prefers
to construct less than 12 dwelling units. With increase in land price and levy
of service tax on construction and related activities, the cost of dwelling
units will increase making it not easily affordable by end users. Apart from actual purchaser price of the flat, the purchaser has to bear 10% towards Stamp
Duty and Registration Charges, 4% towards sales tax, and 10.20% towards service
tax and expenditure towards Katha, tax assessment etc,thus purchaser has to
pay nearly 25% of purchase price towards various taxes, duties and levies.May
the middle class may have to forget about owning a flat and settle for a small
houses like sardine packs, without any proper facility.
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