Post Budget Analysis: How the Service Tax Hike Will Hurt Real Estate

The government hiked the service tax from 12.36 to 14% in the Union Budget 2015-16 tabled in the Parliament on February 28. While the general consensus on indirect taxes such as these is far from positive, PropTiger.com lists four ways in which this might hurt the real estate sector:

[caption id="" align="aligncenter" width="701"] The hike in service tax will put additional financial burden on home buyers looking to invest in affordable housing this year (Picture Credit: wikimedia.org) [/caption]

Higher Construction Costs: In the Finance Act, 2004, “construction service” is listed as a taxable service. The investee company which provides construction services are expected to comply with the service tax rules. According to the Finance Act 2007, immovable property, residential property or vacant land that is rented out or used for commercial purposes are taxable too. Though the NDA government is outwardly committed to affordable housing, the increase in service tax is set to make housing more expensive if the builders decide to pass on the expenses to the homebuyers.

Higher Rents For Small Enterprises: The micro small and medium enterprises will now be expected to pay service tax on the rent, while larger enterprises will be able to claim Cenvat(Central Value Added Tax) Credit on the tax paid. It is true that a small enterprise can claim service tax exemption if the aggregate turnover value of the product is lower than Rs 10 Lakh. But, the owners who rent out their buildings to small enterprises are expected to pay service tax if their rental income from the project is greater than Rs 10 lakh. The owners of those buildings might transfer the burden of taxation to these small enterprises.

Greater Living Expenses: When the service tax goes up, cab services, restaurants, and gymnasiums will charge more. With these added expenses in common man's monthly budget, there will be less disposable income for housing and rental expenses. 

Expensive Home Loans: The cost of financial services, like the processing charges for home loans, will go up, raising the cost of buying a home. Besides, an average homebuyer will grapple with other additional expenses like the charge levied on processing of demand drafts. Life insurance premiums will also go up. Such additional expenses might compel people to allocate less to housing, rental and other expenses.

For full coverage of post-Budget analysis, read Union Budget 2015-16: The Halfway Reforms For Real Estate