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SINHGAD INSTITUTE OF BUSINESS MANAGEMENT, MUMBAI

A study on impact of introducing service tax in real estate sector (in Mumbai)
Submitted to Prof. Nilesh Kulkarni

Submitted by
Pradeep Kamath Neha Jadhav Manoj Raut Mitesh Bangera Ramkaran Yadav Swapnil Patil

Abstract
The Indian economy has witnessed robust growth in the last few years and is expected to be one of the fastest growing economies in the coming years. Demand for commercial property is being driven by India's economic growth. Real estate in India contributes about 5 per cent to India's gross domestic product (GDP). Real estate plays an important role in the Indian economy. This sector happens to be the second largest employer after agriculture and is expected to grow at the rate of 30 per cent over the next decade. The size of the Indian real estate market is expected to touch US$ 180 billion by 2020. In the 2010-11 Budget, it was suggested to levy Service Tax on those residential projects which are under construction. Our Study is based on the Impact of charge of Service Tax on under construction property in real estate.

INTRODUCTION Current Scenario of Mumbai Real Estate


Mumbai is a mature and well-developed Real Estate market. It is a demandmotivated market; where the property is bought for current use and not with the aim to speculate and sell it in future. This has led to the burgeoning of the Mumbai Real Estate market. The spurt in demand as well as supply of Real Estate products and the consequent increase in capital values are encouraging High Networth Investors (HNI) and other investors to make active investments in the Mumbai Real Estate market. The investments made by the Investors and HNI's have showed an astonishing 50% increase per year. The rent collection of the Real Estate investments is at an attractive 11 to 12 percent per annum, thus translating into a gain of over 70% in two years, which is a stunner by any standards. The most attractive sectors for investment are the commercial Real Estate sector. Another high paying sector is retail. The occupancy levels of most commercial buildings are at 90 to 95 percent. Commercial properties have shown capital appreciation in the region of 15% to 35% in values per year .Land prices are expected to escalate by 5 to 10 percent in Mumbai according to the government authorities responsible for stamp duty and registration. Prices in south and central Mumbai are expected to move up the most. In case of Residential property, maximum demand is found in the mid-level segment. The demands for 3BHK properties are also set to increase. This demand is due to factors like high disposable income and total greater affordability. The demand for residential property can be sustained if the Indian economy remains stable and the interest rate low. Residential property has shown an appreciation of 15 to 20 percent over the last year. The rent takings have also increased by 20% over the same time period.

What is Service Tax? The Service Tax is a Tax that is imposed or charged on the Services rendered by a Service provider. A Service Tax can be charged or imposed by a Service provider in accordance to the Finance Act 1994. In the 2010-11 Budget, it was suggested to levy Service Tax on those residential projects which are under construction. This news was a kind of shock for home buyers as this would end in raising the cost of owning a flat. Initially it was decided that the service tax would be levied on 33% of the property value but later on the Finance Minister rolled back service tax to 25% of the property value. This service tax is to be paid by property buyers, to the builders, who would in turn deposit the amount to the tax authorities. For a buyer, thus, the additional service tax would push the cost of his home by a few more lakhs

What you actually need to pay for? Following points briefly describe the applicability of the service tax and what investors actually need to pay for. 1) Tax on Under Construction Properties Only - Service tax is applicable only on purchase of under construction properties. A property is deemed to be under construction, till the builder receives a completion certificate from the local municipal authorities for the same. Therefore, if a buyer pays the complete amount for the property, after the builder has received the completion certificate for his complex, no service tax would be applicable for the buyer. 2) Abatement Allowed- Tax Applicable only on 25% of the Construction Value Abatement, in tax parlance, refers to a portion of the value of the taxable service, which would be exempt, as per a government notification. As per the Government Abatement scheme, under notification 1/2006 dated 01 Mar 2006, a contractor is entitled to claim abatement to the extent of 67 per cent of the value of services rendered by him, which would be exempt from tax. This

amount quoted by developers is towards cost of land and materials. The balance 33% amount is considered as service provided, hence taxed. However, the Finance Minister has recently increased the abatement from 67 per cent to 75 per cent. Service Tax, therefore, would be on 25% of the value of the property and not on the entire cost. Tax would be applicable only on the cost of labour or services of the builder or developer. All costs of land and construction material of the property would not fall under the purview of service tax. . 3) Resale Properties - There would be no service tax on resale properties. As service tax is applicable only on under construction properties which has not yet received a completion certificate, resale properties do not attract any service tax as they already would have obtained a completion certificate.

4) Parking Slots or Garage of Properties - Along with the apartment or flat, builders also sell parking slots to buyers. No service tax would be applicable for the amount paid for such parking slots.

5) Preferential Location Services - Builders many times will build internal roads, pavements, or maintain gardens for the development of the property complex. Such services would attract a service tax. Also any additional amount paid for a floor rise, an apartment with a specific number or a specific direction, apartment facing either a park, pool or sea , would cost the buyer a service tax.

6) Low Cost Housing Segment - In recent months, the real estate industry has developed various affordable properties worth less than Rs 20 Lakhs for the lower and middle income group. Properties belonging to this low cost housing segment would be exempt from service tax.

Recent Development in Service Tax in Real Estate


In the budget for 2010 both Central and State Governments have made certain amendments to levy tax on sale of immovable property under construction to enhance their revenue and to overcome certain judicial pronouncements. An attempt is made to discuss the implications of the above amendments on the real estate transactions as to how the general public will be affected by way of additional cost on account of the above mentioned amendments. Service Tax By the Finance Act, 2010 the Government has amended the definition of Commercial or Industrial Construction Service [Section 65 (25b)] and construction of Residential Complex [Section 65 (30a) ] The scope of these categories is expanded to cover sale of flats/units under construction. Builders/developers are now liable to service tax if any payment towards sale consideration is received before the grant of completion certificate by the competent authorities for such flats/units. Therefore, if a builder/developer receives the entire sale consideration for flats/units after issue of completion certificate, the same is not liable to service tax. Union Budget 2012-13 Telephone use, eat-outs and other activities will cost more as Finance Minister Pranab Mukherjee on 16th March 2012 proposed increasing the service tax rate to 12 % from 10 % and introducing a negative list aimed at bringing more services under the tax net. The government has estimated to collect Rs 95,000 crore from service tax in the current fiscal and has pegged the next year's target at Rs 1.24 lakh crore.

Purpose of study:
1] To find out the impact it has caused on the buyers decision. 2] To find out the impact of introducing service tax on developers 3] To study how the builders & developers are able to attract buyers amidst home price hike due to introduction of service tax.

Objectives of study:
1] To study the overall scenario of the real estate industry. 2] To look into whether there is any shift in the buying behavior on the part of home buyers. 3] To look as to how the charge of service tax would help in the future growth of the real estate industry & the Indian economy at large. 4] To gather relevant data from specific sources which would provide gist or major chunk of information pertaining to our topic.

Significance of the study


This study will provide framework that will help the researchers to understand what factors influence the buyers to buy the houses in Mumbai , and also help the researchers to understand about how service tax is going to affect home buyers from consumers point of view. This study will provide information regarding how introduction of service tax will affect real estate sector in Mumbai.

Limitations of the study


These studies have certain limitations also and they are as follows: Time constraints. Coverage of only locations like Chandivali area only.

Sample size is of only 40 respondents.

Literature Review
Exclude land value from service tax: ICAI (Institute of Chartered Accountants of India)
http://content.magicbricks.com/exclude-land-value-from-service-tax-icai

Budget Reactions: Service tax hike to pinch home buyers, says Sunteck Realty
Moneycontrol.com

Service tax may take toll on realty


Paramita Chatterjee, ET Bureau

Union Budget 2012-13: Now buying or building of a house to cost more


Purchase or construction of a house would now cost more due to expected rise in prices of key raw materials cement and steel and a hike in service tax by 2 per cent, realty players said. http://economictimes.indiatimes.com

Budget 2012: Realty players say Budget gives them a much-needed breather

DNA

Friday, Mar 16, 2012

Methodology

Research Design
Research design refers to the conceptual structure within which research is conducted. It is like a blue print for the collection, measurement and analysis of data. Our study is about the charge of service tax on under construction property in real estate sector We are conducting this study to find out the possible impact of service tax on real estate sector in Mumbai. We have conducted the study in Powai area of Mumbai. We have collected data pertaining to questions which are asked in the questionnaire. It took us about 2 weeks to collect relevant data relating to our study. We have used primary method to collect the data and that is through questionnaire. We have collected the data for our study by using simple random sampling procedure.

Hypothesis
Null Hypothesis H0: 1 = 2 (There is no impact on real estate after introducing service tax) Alternative Hypothesis Ha1: 1 > 2 (There is positive impact on real estate after introducing service tax) Ha1: 1 > 2 (There is negative impact on real estate after introducing service tax) Hypothesis Testing It determines the validity of the assumption technically described as Null Hypotheses with view to choose between two conflicting hypotheses about the value of a population parameter. In our study,maximum respondents disagree that there will be an impact of charge of service tax on under construction property. Due to this we came to the conclusion that we will accept the null hypotheses.

As per our data collection we set the level of significance to be 5% and mean to be 10.66 Based on certain parameters we found out the result came to be -4 Yes- 1 Cant say- 0 No- -1 Based on our findings the total no of Yes came to 9 , No 13 & cant say 10

On calculation we found out the result to be -4

Data Collection
Data collection refers to the method of collecting data for the purpose of conducting research study. There are two methods of data collection 1 Primary 2 Secondary Primary method includes data collection through observation, interviews, questionnaires, audits etc. Secondary method includes data collection through books/magazines/news papers, trade journals,reports,public record & statistics etc In our research study we have collected data through primary method of collecting data that is through questionnaire.

Data Analysis
Data analysis refers to the computation of data with respect to searching for patterns of relationships that exist among data groups. Analysis of data involves a number of closely related operations which are performed with the purpose of summarizing the collected data and organizing these in such a manner that they answer the research questions. We have analyzed data in very simple & understandable manner. After analyzing the age groups of our respondents

Age Groups Below 20 21-25 26-35 35-55

Respondents 1 23 4 4

In our analysis, we found out that 19 people of age group 21-25 whereas all 4 respondents of age group 26-35 and 35-55 were aware of Service Tax charged on under construction property. Further, 7 respondents in age group 21-25 and all 4 of age group 36-35 & 35-55 agree that its is good to levy Service Tax on Under construction property. Further more 5 respondents in the age group of 21-25, 2 respondents 26-35,2 of 36-55 agree that there would be reduction in buying House Property.

Population & Sample


Sampling may be defined as the selection of some part of an aggregate or totality on the basis of which judgement or inference about the aggregate is made.In other words ,it is the process of obtaining information about an entire population by examining only a part of it. In sampling analysis the most important thing is what should be the size of sample or how large or small should be n? Technically,the sample size should be large enough to give a confidence interval of desired width and as such size of the sample must be chosen by some logical process before sample is taken from universe. In our study we have taken population as 1280 and we have considered sample size of 32.

Conclusion, implication of Study


As per survey and the study conducted among various age groups regarding their view about charge of service tax on Real estate, we conclude that there wont be any impact of Charge of Service Tax on Real Estate. To conclude, most of the people are with the view that it is good to levy Service Tax on Real Estate. They even think that there wont be any fall in buying Property inspite of the service Tax.

QUESTIONNAIRE

Name:- ______________________________________ Gender:- Male Age Below 20 21-25 26-35 35-55 Female

Mobile No:-___________________________________ Email_ID :- ____________________________________

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1] Are you aware about Charge of Service Tax on Under Construction Property? YES NO

2] Is it good to levy Service Tax on Under Construction Property? YES NO

Why .. ..

3] Do you think there will be a reduction in buying house property?

YES

NO

CANT SAY

4] Would you buy a new house despite hike in property prices due to levy of Service Tax? YES NO

5] What according to you could be the possible impact or effect due to such levy of Service Tax on Under Construction Property? . . .

Bibliography : Newspaper The Economic Times,DNA Internet Books Research Methodology by C.R.Kothari.