Property Developers Vs Finance Minister

Property Developers are highly disappointed with the provisions laid in the budget. They have raised a clamour against higher taxation, seeking a rollback of the service tax levy of 12.36 per cent on firms that rent out immovable property.

The Confederation of Real Estate Developers Association of India (Credai) has decided to call a meeting with the finance minister, P. Chidambaram on Monday, March 05, 2007, asking to withdraw the levy.

However, the real estate developers are not likely to get much solace with such a move as the Mr. Chidambaram seems to be in no mood to make any amendments in the new rules unless there is huge political pressure to do so. This is why; they have decided to take the assistance of legal people as they could exploit to make the levy untenable.

Since the commercial buildings stand on land, we can challenge the incidence of service tax. We are in the process of collecting further information, says Raj Menda, national secretary, Credai, who was in the city for a foundation stone laying ceremony of his company RMZ Corp’s joint venture project.

The real estate developers are turning the things in their benefit by twisting the actual scenario which does not demand them to pay tax on lease rentals but on the service provided by firms that lease out immovable property, says Narayan Jain, a senior tax consultant. The distinction is important as the load have to be borne by the service provider rather than the individual paying lease rentals.

Any act can be challenged in the court and termed as an ultra vires transactions, acts or enactments by corporations in excess of their chartered or statutory rights. Raj Menda, whose company RMZ Corp, is getting calls from IT clients who are anxious about their investments made in commercial sector.

In cities like Mumbai, rents can increase to Rs 40 per sq ft from the current Rs 30 per sq ft say property consultants and developers.

The lawyers are gathering the information on a similar case including issues like service tax, central tax over state tax (land tax). One of the state courts released out the rule which says, “Central tax could not be imposed over and above the existing land tax levied by the state on which the hoarding stands.”


Who is going to win? Developers or our very own Mr. Chidambaram?
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  • Realty lobby to move court on rent tax plan

    Interesting! I'm on FM's side......

    CREDAI team to appeal to finance minister to withdraw the service tax. Confederation of Real Estate Developer's Associations of India (CREDAI), the apex body of organized real estate developers and builders across India, has planned to move court if the budget proposal of service tax net on lease rental income from commercial business is not rolled back by Finance Minister P Chidambaram.

    CREDAI has taken legal opinion on the issue and is arguing that any taxation on income from land is a state subject and not under the jurisdiction of the Centre.

    "Any tax on land is subject to state jurisdiction and the Centre cannot levy any tax on income, which is accruing from land," CREDAI national secretary Raj Menda said.

    A delegation from CREDAI will shortly meet the Finance Minister to request him to withdraw the service tax on rental income from commercial business. In case the Finance Bill gets passed without change in the provision, CREDAI would have no option but to move court to seek redressal, Menda said

    In all 18 state level associations spread over 17 states of the country are members of CREDAI.

    The budget proposal of inclusion of lease rental income from commercial business in service tax net would have a negative impact for companies in commercial segment although lease rental agreements have provisions for tax increases, Menda said.

    The real estate developers are apprehending that in the longer run companies may not be able to pass through these tax increases as the tenant or occupant may refuse to pay service tax at 12.5 per cent of the rent.

    In that case the owners may have to absorb the increase leading to lowering of yields significantly. This will drive a typical investor to divert his investment to other asset classes.

    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%.

    The pinch would be felt most by the occupiers of leased commercial office space or retail sector. In the retail segment almost 30 per cent of the total costs were real estate costs.
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