Prepare to dolE out more for homes

Says Pranab Datta,MD of Knight Frank India,As per our estimates,the impact of service tax alone would be to the tune of 3.5 to 4 per cent. This levy will in all probability be passed on to the consumers.

Thus,the higher levy,coupled with banks removing incentives for home loan seekers,will mean a home buyer will have to shell out roughly 10 per cent more in addition to the property price.

According to Sanjay Dutt,CEO – Business,Jones Lang LaSalle Meghraj: It can be stated that the benefits for home buyers implied by the announced tax savings and interest rate subvention will,to a certain extent,be negated by the service tax to be levied on construction costs for yet-to-be-completed buildings and on properties in preferred locations. Builders will tend to pass on this additional burden to their customers by increasing their property prices proportionately.

IMPACTING THE END-USERS

As per the provision,unless the entire consideration for the property is paid after the completion of construction (that is,after receipt of completion certificate from the competent authority),the activity of construction would be deemed to be a taxable service,provided by the developer to the prospective buyer and service tax would be charged accordingly.

Effectively,this means all buyers would have to pay service tax for the purchase of any apartment or commercial units. The tax amount will come to about 3.5 per cent of the cost of the apartment,which includes the value of land and also the cost of construction.

According to Confederation of Real Estate Developers Associations of India (Credai) there are two serious flaws in this provision. First,the sale of apartment/commercial spaces is a sale of immovable property and is governed by the Transfer of Property Act. It cannot,therefore,also be a service attracting service tax. Second,all states require buyers to pay stamp duty on the transfer or sale of apartments and commercial spaces and this ranges from 5-9 per cent across the country. The payment of stamp duty and service tax on the same property constitutes a clear case of double taxation. Imposing a new tax is contrary to the declared policy of reducing the transaction costs on the sale of immovable property.

Credai has opposed the levy of service tax on the sale of apartments,home or commercial space. Says Kumar Gera,chairman of Credai,The issue of applicability of service tax to all under construction flats and homes being booked prior to completion will increase the end cost and this will significantly impact affordability of the home buyers.

Describing the issue as crucial,Santosh Rungta,president of Credai says The issue of applicability of the service tax levied on renting of commercial property and for under-construction units is a major area of concern for the developers. This tax will be an additional burden and project costs will shoot up by 4-5 per cent. Consumers,thus will be most affected when this increased cost being passed onto them. Moreover,indirect taxes on raw materials for the industry like steel,cement,etc will further escalate project costs.

Developers,too,are indicating an impending hike in property prices. The countrys largest real estate developer DLF explains that properties would turn dearer as developers would have to pass on the service tax burden to end-users. If the indication from the bank and government is to raise the price,then why prices will not go up? That means the economy is ready to take a price hike. It will be incorrect to infer that developers should not raise prices. How can you have two differing signals? asks Rajeev Talwar,DLFs group executive director.

However,he did not quantify the expected escalation in the prices,saying,It will fluctuate from location to location and project to project.

NO MORE TEASER LOAN

Making the situation worse,the home loan vendors are making the home buying decision more draining. Last week,leading home financiers ICICI Bank and Housing Development Finance Corporation (HDFC) ended their teaser home loan schemes,under which rates were as low as 8 to 8.25 per cent in the initial years.

In the new scenario,for a 20-year loan of Rs 20 lakh borrowers will have to shell out Rs 633 more in terms of equated monthly instalments (EMIs) compared to people who have already raised their loans. Thus,the EMI will rise from Rs 17,041 to Rs 17,674.

Other banks,too,are joining the bandwagon. Kotak Mahindra Bank has announced a hike in home loan rates. A few weeks ago,two other banks withdrew their schemes for offering low rates in the initial years of the loan. Now,the new home buyers will now have to pay 0.25 to 0.5 per cent of additional interest. This is because the Reserve Bank of India has impounded more bank cash to check inflation,with the cash reserve ratio being raised by 0.75 per cent to 5.75 per cent in February. For those who applied before the announcement,they will get the old rate as long as the loan is disbursed before March 31. According to an ICICI Bank spokesperson the two-year fixed-rate home loan scheme has been discontinued from March 1,2010. The current floating home loan rates are 8.75 per cent for loans up to Rs 30 lakh,9 per cent for Rs 30 to 50 lakh and 9.5 per cent above Rs 50 lakh.

Axis Bank and Union Bank of India had earlier announced the closure of their special loan schemes around mid-February,2010.

Tougher times are ahead. Bankers say they expect rates to rise by another 0.25 to 0.5 per cent after two-three months when the Reserve Bank ups rates in general at its next credit policy review in April.

AFTER EFFECTS

Some property dealers in metros have already started seeing a slowdown in property enquiries. Says Pradeep Mishra,a Delhi-based real estate broker: Already the sales and inquires have started slowing down by nearly 50 per cent in the past one week. Buyers are dissuaded by the service and excise taxes on construction material which are going to make homes further unaffordable. Also,developers are going to increase prices as soon as service tax gets into effect.

However,some developers are of the view that this will not affect the demands. A slight rise in property rate will not result in subside of demands,particularly,in suburban areas as home buyers have no option than to face the reality, says RK Arora,chairman of Supertech,a Noida-based builder.

Credai feels that imposing a new tax is contrary to the declared policy on development of housing in the country by reducing the transaction costs on the sale of immovable property. We plan to meet the finance minister requesting him to roll back the proposed service tax imposed on the real estate sector, says Kumar Gera,chairman of Credai.

In the changing scenario with things going against home buyers who are already faced with the rising inflation,buying a home will become more challenging in times to come.

praveen.singhexpressindia.com