Real estate service tax increase in India expected to dampen rising market

Rise in service tax would impact India real estate completions

A rise in the service tax on real estate completions in India is expected to have a temporary impact on sales, according to industry commentators.

The service tax of 10.3% on 25% of the property’s value is being passed on direct by developers and means a buyer paying an extra 2.6% on projects under construction.

According to Jackbastian Nazareth, chief operating officer of Puravankara Projects the impact is likely to be short term as most current buyers are end users rather than investors.

The global economic downturn seriously curbed speculation in the market place and now that the real estate industry is recovering as the economic outlook improves the demand is from those looking for a home, he explained.

The increase is being passed on to buyers as most developers were already dealing with price rises of raw materials like cement and steel in recent times, he added.

‘The imposition of a service tax may increase the price to some extent. However, with the economy showing great momentum and improved business and job scenario, the present fiscal will be much better than the previous one,’ said J C Sharma, managing director of Sobha Developers.

Goutam Chakraborty, regional director of real estate consultancy firm, Colliers International, believes though the impact might be deeper. ‘As property prices have already increased 15 to 30% any additional cost component will have some negative impact on the residential market,’ he said. He added that any rate hike in home loans could also dampen the market.

Real estate consultancy firm Jones Lang Lasalle Megharaj (JLLM) also believes that the recent service tax could be too much of a burden for potential buyers who are already dealing with hike in property prices.

‘Recent service tax imposition will increase the unaffordability quotient of homes, especially in cities like Mumbai and Delhi, where home buyers are already struggling with the recent spurt in residential property prices,’ said Gautam Hora, vice president-capital markets of JLLM said.

He also said, in cities like Pune, Bangalore, Chennai and Hyderabad, where buyers were more price sensitive, developers would have greater challenges with rising prices.

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