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Realtors jolted

Real estate, air travel and logistics players may suffer somewhat as they would have to charge service tax from their customers. See graphics

business Updated: Feb 21, 2011 16:35 IST
HT Correspondents
HT Correspondents
Hindustan Times

Real estate, air travel and logistics players may suffer somewhat as they would have to charge service tax from their customers. The Budget move that has extended the ambit of the service tax to more industries could hurt demand from price conscious customers.

Real estate developers will now be liable to service tax on transactions where prospective buyers make payments prior to completion of construction of property. This will put a burden on the developers.

The increase in excise duty on cement could further push up construction costs, challenging companies to keep their price levels in check. In a competitive market place, this could potentially impact the revenues of developers such as DLF, Unitech and Ansal.

“It appears that the finance minister has levied 10.3 per cent service tax on first time buyers of residential apartments which certainly will impact the sales of apartments and will be an extra burden for people booking apartment which are under construction,” said Anshuman Magazine, CMD of global real estate consulting firm CB Richard Ellis South Asia.

“This is totally retrogressive step that is bound to increase the prices and will have a negative impact on the demand. If the government is levying a fresh service tax, how can it advise the state government to reduce the stamp duty,” said the head of leading real estate company who did not what to be identified.

Developers will also be taxed on the premiums they charge for homes or apartments in preferred locations such as those that face swimming pools or parks. Further, the budget also seeks to impose service tax on renting of immovable properties. This has been strongly opposed by industry players who say this will further reduce the demand as those investors who buy real estate for investment purposes may no longer find it attractive.

The above proposals can significantly undermine some of the other non-tax measures announced for the realty sector.

The budget has also made the transportation of goods by the Railways taxable. Air travel, whether domestic or international, by all classes will now attract service tax at 10 per cent.

“The proposed hike will not impact aviation companies in the short and medium term but in the long term people can look at other modes of transport in the domestic sector,” said Ankur Bhatia, executive director, Bird group, a leading travel solutions firm. However, credit for duties and taxes paid on purchase of aircraft, fuel (ATF) should help contain the impact of service tax on airlines to a significant extent.

At present, in the case of information technology and software services, the levy of tax is limited only to the cases where IT software is used to further business or commerce. The scope of the taxable service is now being expanded to cover all cases irrespective of its use. This may have a negative impact on IT firms as consumers may shift to pirated software.

Services provided for maintenance of medical records of employees of a business entity and electricity exchanges would also be taxed.

Besides, promotion, marketing or organising of games of chance, including lottery, is being introduced as a separate service. Similarly, copyrights on cinematographic films and sound recording have been brought under the ambit of service tax. However, copyright on original literary, dramatic, musical and artistic works would continue to remain outside the scope of service tax.

First Published: Feb 27, 2010 01:52 IST