New service tax regime boon for builders, neutral to consumers

• One, he can segregate material and serice components of the total contract value and pay the service tax on the service he renders, and claim input tax (Cenvat) credit on the materials.

• Two, he can pay the service tax at 33 per cent of the contract value, without availing of set-off of the excise incidence on building materials.

So, there is effectively an additional tax incidence of 3.36 per cent. However, the builder outsoures many services, too, forming a major chunk of the labour cost. These include architectural, building consultancy, engineering, transport and project management services. Even prior to Tuesday’s notification, these services had attracted service tax. But the builder has not been able to claim input tax credit, as the services he was to render after using these services were not under the tax net.

Now that the service that he renders is also under the tax ambit, he can legitimately claim input tax credit with no apparent legal obligation to pass the benefit to the end consumer.

In fact, supply of manpower would also be under service tax from June 16.

Even this core componet of non-material component of the construction contract service could now be offset by the builder through input tax credit. ‘‘Under the new regime, in most cases, the input tax credit could become more than the builder’s output tax liability,’’ said Sachin Menon, partner, Ernst & Young.

Also, the new regime could lead to a situation wherein owners of posh and roomy homes would not pay any service tax, while dwellers in comparatively smaller residentail units would attract the tax. ‘‘Buildings comprising large units mostly have less than 12 units,’’ pointed out Menon.

But the real estate industry does not endorse this view. According to the builders, there are two ways the proposed impost will impact the real estate. ‘‘Since the service tax increase will be on a third of the construction cost, it will push up the cost of construction by 3-4 per cent,’’ says Rohit Modi, director, Ashiana Housing Pvt Ltd. Though in itself this may not be a big amount, the resistance from the middle-income consumer is expected since it follows a rise in interest rates by 50 basis points and real estate values where the benchmark value has gone up 20 per cent already.

According to V. Suresh, CEO, Aerens Gold Souk and former CMD, Hudco, the actual construction cost in a real estate project is 65 per cent, with 35 per cent going to infrastructure works such as roads, water, sewage laying, landscaping and so on. About 33-35 per cent of the 65 per cent of building construction cost includes labour cost. This will now be taxed and attract a hike of 3.6-4 per cent hike. Of the Infrastructure component of the township development cost, about 40 per cent will attract the service tax. Therefore, construction cost overall will increase about 5 per cent, which will be passed on to the consumer.

Another outcome that Suresh sees is a gradual move from labour-intensive in-site construction methods to more mechanical and technology-based construction.

While the construction component of infrastructure works will continue to be labour-intensive, the service tax regime may impact, beside the end-consumer of real estate projects, the 3.2 crore construction workers in the country.