Home prices to go up by 2.5% as service tax kicks in

Home prices will increase by about 2.5 percent with the implementation of service tax on the residential segment with effect from today, a leading property consultant said.

Last Updated: Jul 02, 2010, 00:06 AM IST

New Delhi: Home prices will increase by about
2.5 percent with the implementation of service tax on the
residential segment with effect from today, a leading property
consultant said.

"The implementation of service tax on residential
properties will result in an increase in the price of homes
for end-consumers. Developers will justifiably be unwilling to
absorb this new tax burden and naturally pass it onto the
buyers," Jones Lang LaSalle Meghraj senior vice-president for
capital markets Gautam Hora said.

"The increase would be to the tune of 2.58 percent.
Following this, overall demand and sales of residential
properties will take a significant hit in all cities," Hora
added.

In the budget 2010-11, Finance Minister Pranab Mukherjee
had brought in real estate complexes under the ambit of
service tax, unless the entire consideration for the property
is paid after completion of construction.

Finance Ministry officials later clarified that service
tax would be imposed on 33 percent of the total sale price as
there is an abatement of 67 percent for input cost.

While replying to the debate on the Finance Bill in
Parliament, Mukherjee increased the rate of abatement from 67
to 75 percent of the gross value where such value includes the
value of the land constructed upon.

Hora of JLLM noted that the rise is enough to increase
the unaffordability quotient of homes, especially in cities
like Mumbai and Delhi, where home-buyers are already
struggling with the recent spurt in prices.

In cities like Pune, Bangalore, Chennai and Hyderabad,
where consumers are more price-sensitive, developers will have
greater challenge with increasing the prices, JLLM said.

"The service tax on homes comes at an inopportune time,
since the revival in residential real estate is still in its
early stages. Such a setback will present yet another
stumbling block," it added.

-PTI