NEW DELHI: Real estate developers said the increase in service tax rate to 14 per cent from 12.36 per cent being enforced from June 1 does not bode well for the industry which is struggling to revive amid lukewarm demand and oversupply.
"The Indian economy has not done well in the last three-four years. The saving and income levels of potential homebuyers are already at the lowest level. The government should have waited till the economy recovered," said Navin Raheja, chairman, National Real Estate Development Council (NAREDCO) and managing director of Raheja Developers.
From next month, the effective service tax rate on real estate will increase to 3.5 per cent from 3.09 per cent at present on properties costing up to Rs 1 crore while it will go up to 4.20 per cent from 3.71 per cent on properties costing more than that. As a result, for a Rs 25 lakh home, the buyer will have to pay Rs 10,250 more while those buying a Rs 2-crore home will have to pay an additional Rs 98,000.
The government should have given the industry more time to recover before rushing to impose the new service tax rate, developers said. Raheja said the biggest problem faced by the industry is the multiple tax regime, which is expected to become history when the Goods and Service Tax (GST) is implemented.
"When the GST is expected to be passed soon, why was the government in a hurry to enhance service tax? It should have waited till the GST bill is passed and implemented," he said.
Home sales have slowed in the past two years, especially in Delhi-National Capital Region, and inventory levels have risen to the highest level ever in the country.
With the increase in service tax, some builders will have no option to offer some discounts to woo buyers and suffer losses in the process, said Deepak Kapoor, president of Confederation of Real Estate Developers' Associations of India (CREDAI) Western UP chapter. "This is despite the fact that the service tax hike will push up prices of raw material for construction," he said.
Vikas Bhasin, managing director of Saya Homes, said under-construction projects will see an increase in prices. "From June onwards, the demand will surely get negatively affected as it will be hard for customers to bear the extra burden," he said. Although the increase in tax rate applies to all services, the real estate industry will be specially affected, said Prithvi Raj Kasana, managing director of Morpheus Group. This is because real estate calls for big-ticket investment commitment from the buyers.
Rupesh Gupta, director, JM Housing said the impact of higher service tax will not only be on the basic selling price of a property but on other aspects as well such as PLC, club membership, legal fees, insurance and others.
"This incremental value will increase the overall price of the unit which will be borne by the customer only," he said.