Boost for affordable housing

The much awaited Budget for 2012 has come and gone. The realty sector had its own wish list. So how many wishes have been granted? Bindu Gopal Rao decodes the fine print to understand the impact of the Budget on the realty sector.

The Budget has given a boost to the affordable housing sector. Real estate companies developing large affordable housing projects with large fund requirements will benefit the most from the easing of external commercial borrowing (ECB) norms as interest rate charged is lower in case of external borrowings in comparison with rates charged by domestic institutions. 

Also the extension of the existing scheme of interest subvention of 1 per cent on housing loans up to Rs 15 lakh, where the cost of the house does not exceed Rs 25 lakh for another year, will boost the affordable housing segment by providing cheaper loans to buyers. 

With the change in the personal income tax slab rates, there will be an increase in disposable income in the hands of the common man which will in turn increase the spending power and boost domestic investments. “Increase in provision under Rural Housing Fund to Rs 4,000 crore from the existing Rs 3,000 crore will provide housing finance to targeted groups in rural areas at competitive rates. Also enhancing the limit of indirect finance under priority sector from Rs 5 lakh to Rs 10 lakh for construction of houses or for slum clearance and rehabilitation of slum dwellers would further promote the affordable housing sector,” says Goutam Chakraborty, Director - Integrated Services, Colliers International. 

Setting up of the Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans will further ensure the easy availability of funds to promote the affordable housing sector. Further, the exemption limit for the monthly charges payable by a member to a housing society has been raised from Rs 3,000 to Rs 5,000 expected to boost affordable housing. 

Service tax

“Service tax was applicable at the rate of 10% on services-related cost of the real estate complex. Now increase in the service tax to 12% would further add to the overall cost of the property. Keeping other factors constant, the property cost of a Rs-50-lakh property has been increased by approx Rs 1.5 lakh in just two years because of service tax implications,” explains Surabhi Arora MRICS, Associate Director, Research, Colliers International.

 Says Lalit Kumar Jain, National President, CREDAI, “Application of TDS on purchase and sale of property will add value to the cost of buying a house. Considering TDS at the rate of 1% and the home loan for 20 years, it will increase 1 EMI to the whole tenure. Increment of service tax by two per cent will definitely create a hitch or delay in buying home because it is not 2% increase in service tax, but a 20% hike in the expenditure which will have to be borne by a home buyer as service tax while purchasing a house.” 

Withholding tax provisions have been extended to cover transfer of certain immovable properties other than agricultural land. “In case of a transfer of an immovable property, the transferee shall be required to withhold tax at the rate of 1% on the consideration paid in excess of Rs 5 million in case of properties situated in urban agglomeration or Rs 2 million in case of any other area. This will help in tax avoidance to a large extent and will definitely help in increasing and advancing the timing of tax revenue collection to the government,” says Mahesh Prabhu - Director, Finance – Century Real Estate. 

Adds Malpani, Co-founder and Head – Marketing & Communities – CommonFloor.com, “This will result in increase in price but will bring down the unaccounted transactions involved in the industry.” “The increased service tax burden can increase the budget of a customer by an additional Rs 30,000 or more,” says T S Sateesh, CMD Hoysala Projects.

The 2% increase in the levied tax will have a financial implication on buyers as material, service and development costs for developers will also increase and ultimately get pushed down to consumers. However, the impact in the increase in total cost outlays will be marginal.

To illustrate this further, service tax is charged on 25% of the sale; assuming one is purchasing property worth Rs 75 lakh, the service tax incidence equates to 7.76 lakh@10% and Rs 7.80 lakh@12%, resulting in a 0.48% increase in costs. 

Says Om Ahuja, CEO - Residential Services, Jones Lang LaSalle India, “with the new Section 54GB, investment of sale proceeds from residential property into shares of a company that further invests into a new asset within a year will qualify for exemption of capital gains tax.”

Service tax rate under the Works Contract composition scheme has been increased from 4% to 4.8%. “For the purpose of determining the value for levy of Service tax, an ad hoc deduction scheme is provided (depending upon the type of contract) in case the value of goods transferred is not intimated to State VAT authorities or cannot be determined by the service provider on actual basis. Thus, the choice of scheme made by the contractor could have a bearing on the overall tax cost,”opines Neeraj Bansal – Director, KPMG India.

Says Architect Kochuthommen Mathew, “One of the major proposals which may have a huge impact on the real estate sector relates to the requirement of deduction of tax at source at 1% on payment of consideration for purchase of an immovable property having value in excess of Rs 25 lakh (Rs 50 lakh for immovable property situated in specified urban areas). This would adversely affect housing demand from Non Resident Indians. Many NRIs do not have PAN cards, and will find it tough to file Income Tax Return to claim refund of the TDS.” Adds Chitty Babu, Chairman and CEO, Akshaya Pvt. Ltd., “The increase in service tax will lead to a .82 per cent increase in the cost of a home.”

Alternatively the buyer will have to pay 0.82 percent more for his home. Prior to the Budget, the service tax was at 10.36 percent and now it is 12.36 percent. Allowing for abatement of 60% on construction cost, the difference would now be 0.82% more (12.36% x 0.4 less 10.36% x 0.4 = 0.82).”


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