Service pinch : The Tribune India

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Service pinch

In case you had zeroed in on an under-construction apartment in an upcoming project, but had delayed making the final move in the hope of getting a “better deal” or more discounts then be prepared to pay more now for the same property.

Service pinch

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Geetu Vaid

In case you had zeroed in on an under-construction apartment in an upcoming project, but had delayed making the final move in the hope of getting a “better deal” or more discounts then be prepared to pay more now for the same property. However, this hike in price has nothing to do with an improvement in the real estate market in the country. The 1.64 per cent increase in the service tax proposed in this year’s budget is the factor that is in play here in changing the price calculations of new properties.

The service tax has been increased to 14 per cent from the earlier 12.36 per cent and homebuyers are going to be affected by this hike as when one buys an under-construction property then the developer is considered to be providing the construction services to the clients, hence the buyer has to pay service tax on the cost of construction.

Besides the cost of construction other facilities like car parking, club membership, fire fighting equipment, lifts, power back up, rainwater harvesting, preferential location etc also fall under the head of services provided by the builder. Along with this service tax is also charged by banks when you go to get your home loan sanctioned, by the brokers, lawyers, valuers and for home insurance also. Maintaining that the hike in service tax will escalate property prices by nearly 0.5 per cent of the total cost Amit Modi, Director ABA CORP and Vice-President CREDAI Western UP, said, “This will also lead to increase in construction costs as raw materials would also become more expensive now. Not only raw material but the cost of labor, fuel and transportation will also be more. This will further pass on the burden on consumers. Even though the percentage increase is less than 2 per cent but the impact would be much higher which is set to increase property rates”.

Thus, this hike in service tax is going to pinch a homebuyer all the way through the purchase process.

The service tax is not charged on the complete cost of the property as the cost of land is excluded. The builders charge it on 25 per cent of the total cost for properties priced less than Rs1 crore and the it is charged on the 30 per cent of the total cost for properties priced above Rs1 crore.

While the decision of major banks to lower the home loan interest rates has given some hope to the “sale starved” developers and homebuyers, the effecto on prices will keep the sale volumes in check for some more time this year.

Impact on sector

The hike has been termed as a step against the government’s mission of providing affordable housing for all by 2022 by buyers as well as developers. “The decision of increasing service tax will hit the affordable housing dream “, said Amit Mittal, Director of tricity-based Maya Gardens group. “If the governemnt is serious about affordable housing then the first house should be exempted from service tax and this tax should be levied on those buying a second home”, added Mittal. “The dampening effect will increase property prices by nearly 0.5 per cent of the total cost which will be a big negative in the current scenario, when sales are at record low creating further stresses across the sector. Real estate in 2014 went through a lot, with sales all time low,” said Anil Mithas, CMD, Unnati Fortune Group. “It is important to understand that even a 1.5 per cent hike is quite large for a high value product like housing. Thus, this will have a direct impact on sale of property”, added Modi.

On the bright side this move has made several buyers consider ready-to-move-in properties now as this hike in tax is not going to affect these properties. Though these units cost more than the ones that are under-construction, yet the ultimate benefits of these are more attractive now as the buyers don’t have to deal with the uncertainity of delays, they can rent these out or move in immediately and save on rentals also. “A number of fresh buyers are now inquiring about properties in projects that are already complete”, says Mittal while maintaining that there has been a substantial increase in queries about apartments in Phase I, II and III of Maya Garden projects in Zirakpur over the past one month.

Thus, to get a “better” deal and to decide between an under-construction property and a ready-to-move-in one you will need to rework the cost component completely and factor in the price hike. Most of the developers mention only the basic price in their advertisements and hoardings. Along with the service tax there is stamp duty and registration charges and other development charges too that are added to the basic cost once you finalise the deal.

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