It's turning into a battle between property developers and home buyers in Maharashtra, as the two argue over who will pay the service tax and the recently-imposed value added tax. The twin blow is holding up a large number of property registrations across the state, say top realty brokers and developers.
In Pune, the auto and information technology hub, property sales have come down by half because of this issue, says Pankaj Kapoor, managing director of Liases Foras, a real estate research and ratings firm. "The Pune market was doing well in the last quarter, now with the imposition (of the levies), it is badly hit. Even the sales have been hit in the peripheral areas of Mumbai," Kapoor says.
According to Kapoor, home sales in Mumbai have been impacted to the extent of 15 to 20 per cent due to the problem.
Recently, the state government imposed one per cent VAT on the contract price of the houses mentioned in the sale agreement registered on or after April 1 this year.
With the Centre's imposition of 2.38 per cent service tax on under-construction properties, which came into effect at the start of July, the additional burden (excluding the five per cent stamp duty and registration charges) comes to 3.38 per cent of the property value.
Suppose, if a person buys a house of Rs 1 crore in Mumbai, he has to now shell out an additional Rs 338,000 as VAT and service tax, which effectively translates into an equated monthly installment of around Rs 4,000.
The realty sector is obviously worried. "There is no clarity on VAT. VAT is put on the sale of goods, while service tax is collected on the services rendered. How can the government impose both the levies?'' asks Pranay Vakil, chairman of Knight Frank India, a property consultancy.
Rajesh Mehta, chairman of Raha Realtors, a leading property brokerage in Mumbai, says 30 to 40 flats in Mumbai, which he helped to sell, are held up because of confusion on VAT. "For flats which are already sold, buyers are not willing to pay the additional amount... Developers are also not ready to bear the extra cost and hence are refusing to hand over the papers for the sold properties," Mehta says. "It will take at least seven to 10 days before the issue gets sorted out. I think July will pass in all this," he adds.
What has made matters worse for buyers is that the additional burden is coming on top of the sharp rise in home prices. According to a report from brokerage house IIFL, residential prices in Mumbai and the National Capital Region of Delhi have increased 20-30 per cent since March and have reached new highs.
"Any additional cost is going to impact sales," says Mrunal Duggar, vice-president, Homebay Residential, a unit of Jones Lang LaSalle Meghraj.
Already home sales in Mumbai went below 6,000 units in May after 11 months of 6,000-plus a month, the IIFL report says.
According to Vakil of Knight Frank, developers have already started asking buyers to put the money in the escrow account or asking for undertakings that if the levies are applicable, buyers have to pay for it.
Developers say the state government might also impose one per cent of the cost of construction as labour charges, which will increase burden further. Duggar of JLLM say developers should look out for the any additional burden on the potential customer in the reviving market.
But developers say they are helpless. "Where will we go? We too have limited margins," says Sandeep Runwal, director, Runwal group.
Adds Sunil Mantri, president of Maharashtra Chamber of Housing Industry, the apex body of developers: "The government has already made it clear that developers will collect the VAT from buyers. But if buyers do not pay, we will be held responsible. It is not correct."
Last week, MCHI filed a writ petition in the Bombay high court against the levying of service tax on properties under construction last week and it is planning to file a petition against VAT on home sales soon, Mantri says.