The finance minister's Budget proposals for the real estate sector have evoked a mixed reaction. Inclusion of lease rental income from commercial business in service tax net may have a marginal negative impact for companies in commercial segment as lease rental agreements have provisions for tax increases.

However, in the longer run companies may not be able to pass through these tax increases.

Moreover, extending service tax on rentals received from immovable property could really be counter productive. Pranay Vakil, chairman, Knight Frank said, "It is possible that the tenant/occupant may refuse to pay the service tax at 12.5% of the rent and the owners may be required to absorb this increase. This will lower the owners' yield significantly and a typical investor may be driven to divert his investment to other asset classes than real estate.

Also the domestic real estate venture capital funds that have already put money into income yielding assets will suddenly find the income going down by 12.5%."

Ambar Maheshwari, Director, Investment Advisory, DTZ India observed that occupies leasing commercial (office space) or retail (shops) would now have to pay a service tax of 12.36% over and above the rentals paid by them. "This will have a major impact on the retailers as real estate costs are as high as 30% of their total costs in some cases.

Commercial real estate may not be severely affected because the demand for commercial office space is driven primarily by the service industry who can set off this service tax burden against service tax credit they receive from rendering their services."

Mofatraj Munot, chairman, Kalpataru Group opined, "Housing being such an important sector which gives great employment opportunities in the country. Despite this, there is no mention about it, and levy of extra excise duty on cement will make housing less affordable. Not extending 80-IB (10) will deter the growth. Sales tax on commercial rental will also affect. So, the dream of affordable housing will be vanished.

Edelweiss Research in its analysis, observed that non-extension of benefits under section 80IB has been negative for the real estate sector. Company NAVs would get revised down. Profit & Loss impact would be felt only later, as most developers get approval for their projects from local authorities 2-3 years in advance.
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  • Service tax on realty may land in SC

    The Confederation of Real Estate Developers’ Association of India (Credai) plans to move the Supreme Court against Union Finance minister P Chidambaram’s Budget proposal of imposing a 12.36% service tax on “renting of immovable property for use in commerce or business."

    Raj Menda, secretary of Credai, the national body of 16 regional real estate associations, said that the finance minister’s service tax proposal is not constitutional as land tax is a state subject.

    Since the building is on the land, any kind of tax on the building can only be imposed by the state government. The central government can't slap any tax.

    Menda said that the association will soon submit its demand to revoke service tax to the finance minister. If the finance minister does not agree with us and Parliament passes the Budget with service tax on lease rentals in place, we will move to the Supreme Court.

    Menda said Credai has already spoken to come senior advocates on the possibility of moving court on the issue.
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