2014 wasn’t a good year for the real estate sector by any means. All the major parameters against which we measure the sectors performance, suffered a huge setback. 2015 thus far has shown positive signs of recovery and a fight back. But a lot was riding on the Union Budget 2015-16 to provide the much needed impetus and boost to the real estate sector. The budget though proved to be a mixed bag for the sector with many reforms harming and hampering the growth prospects of an already bleeding sector. One such measure was the spike in service tax to 14% from the prevailing 12.4%. Here let’s take a look at how the hike could dampen the mood of the sector.
Expensive Home Loans: Costs involved in financial services like home loans processing fees will significantly shoot up, thus raising the costs involved in buying a home. An average home buyer will also have to wage a war against other surplus charges like processing fees levied on demand drafts. Life Insurance premiums are also in line for a hike. This additional burden on ones pocket might lead to fewer resources being channeled towards the real estate sector.
Greater Living Expenses: With an increase in service tax everything ranging from gymnasiums, cab rides, movie fares, restaurant food and many more amenities become dearer to access. This increased dent in the common mans pocket would leave less disposable income to be spent on purchasing a home or renting one.
Higher Construction Costs: The micro medium and small enterprises will now have to shell out service tax on the rent paid by them. On the other hand larger enterprises can claim Central Value added Tax credit on the tax paid by them. If the aggregate turnover of small enterprises project is lesser then 10 Lakhs then the enterprise can claim can claim tax exemption. Bu the landlords who rents out these facilities are expected to pay rent on their rental incomes if it exceeds Rs 10 Lakhs. The burden of these taxes might very well be transferred to such small enterprises.
Higher Rents for Small Enterprises: As per the Finance Act of 2004, construction service is taxable. The company extending construction services are expected to adhere to service tax rules. As per the act vacant plot or residential property used for commercial purpose or rented out are taxable as well. The Narendra Modi led NDA government seems committed towards the cause of affordable housing but the move to hike the all important service tax makes housing even more expensive then what it already is.
So in order to sum things up, the spike in service tax will add to the already mounting financial burden on the people of India and will leave fewer resources at their disposal to be invested in the real estate sector.