Thursday, March 11, 2010

>INDIA PROPERTY: Service Tax Issue – Maintain Benign Impact

Quick Comment Impact on our views: We continue to believe that the likely impact of service tax on the ‘Construction of complex services’ as altered/expanded in the Budget F11 will be benign (3-4% of sale value), though negative.

We delved deeper in the service tax issue by accessing – 1) a document issued by Tax Research Unit of Ministry of Finance subsequent to Budget F11, 2) the original government notification which introduced service tax on residential complex way back in 2005 and 3) circulars issued thereafter on this issue. See inside.

Our understanding of the issue is as follows –
1.This is an old tax introduced in 2005 (for residential units), to which there was a varying degree of adherence (mostly low) given the different industry practices of ‘executing’ apartment sale (pre-sales, sale of undivided portion of the land, split documentation etc). Different patterns of execution have given rise to disputes and discrimination in terms of service tax payment.

2. The Budget F11 seeks to achieve the legislative intent and bring parity of tax treatment so as to expand the
scope of the existing service, which otherwise remains unchanged.

3. Though not entirely unambiguous, service tax (10.3%) should be levied on the gross value (sale value
less land cost) of pre-sold units. However, developers can avail themselves of a 67% abatement (so as not to
double tax goods and material used) on the gross value. This translates into service tax of roughly 3.4% on the
sale value (assuming zero land cost). This can be lower depending on the extent of the share of the land cost in
the overall sale value.

4. In addition, the introduction of the service tax on PLC, IDC and EDCs is likely to add 1% to the above calculations. So, we estimate an overall impact of 3-4%. Mid term, these measures will assist government to transition service tax on the sector to a universal GST regime, in our view.

To read the full report: INDIA PROPERTY