The Institute of Chartered Accountants of India (ICAI), the accounting regulator, is looking to consult with the finance ministry to simplify the structure of service tax on construction activities and push three methods of calculating the tax.
The real estate developers in the country were opposing the service tax levied on the construction sector in the budget. To please developers and protect home owners from a drastic hike in home prices, finance minister Pranab Mukherjee had on April 29 reduced the gross sale value of property from 33% to 25% for tax consideration, which in effect would reduce the taxable portion.
ICAI has suggested that tax can be computed through three methods:
1. First the direct method, in which the actual value of service element in the sale consideration is computed by the builder and substantiated from records.
2. Second, the indirect method, in which exclusion of value of land should be at the option of the builder on actual basis or deemed basis of specified percentage of the composite contract. The treatment will be different for different places and for different uses. Also, in this method, the developer can exclude the value of material/ goods on actual basis where actual value could be determined in the course of providing service or on deemed basis after considering the specified percentage, which is at 67%.
3. The last method mooted by ICAI is to have 1% tax on the total consideration, including floor rise and charges for any additional facilities/ utilities provided by the builder.
However, sector specialists are still sceptical on the impact of the service tax sop offered by the finance ministry.
“Whether this increase in abatement (67% to 75% ) is sufficient to negate land cost, which forms a significant value of the gross taxable base on which such abatement applies, is debatable and hence may be viewed by the industry as a partial relief,” Harishanker Subramaniam, partner – indirect tax, Ernst & Young said.
National Real Estate Development Council president Rohtas Goel said the cost of housing projects shall increase by at least 5% on account of cumulative impact of policy changes and tax increase. The industry was expecting a complete reversal of service tax on construction activities.