BURDEN ON FLAT PURCHASERS

(Advocate S Selvakumar|Property advocates in Bangalore|Property lawyers in Bangalore)

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.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

1. The project should have a plot area of minimum one acre.
2. Residential unit should have maximum built up area of 1000 sft in Delhi, Mumbai and 1500sqft in other areas.
3. The built up area for commercial and shopping should not exceed 5% or 2000sqft whichever is less.
4. 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 were 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 the entire 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 have 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 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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Advocate Selvakumar

Property transfer advisor