Developers will be unwilling to absorb this new tax burden and will pass it onto the buyers, Jones Lang LaSalle Meghraj senior vice-president for capital markets Gautam Hora said
Home prices will increase by about 2.5% with the implementation of service tax on the residential segment with effect from 1st July, reports PTI.
"The implementation of service tax on residential properties will result in an increase in the price of homes for end-consumers. Developers will justifiably be unwilling to absorb this new tax burden and naturally pass it onto the buyers," Jones Lang LaSalle Meghraj (JLLM) senior vice-president for capital markets Gautam Hora said.
"The increase would be to the tune of 2.58%.
Following this, overall demand and sales of residential properties will take a significant hit in all cities," Mr Hora added.
In the Budget for 2010-11, finance minister Pranab Mukherjee had brought in real-estate complexes under the ambit of service tax, unless the entire consideration for the property is paid after completion of construction.
Finance ministry officials later clarified that service tax would be imposed on 33% of the total sale price as there is an abatement of 67% for input cost.
While replying to the debate on the Finance Bill in Parliament, Mr Mukherjee increased the rate of abatement from 67% to 75% of the gross value where such value includes the value of the land constructed upon.
Mr Hora of JLLM noted that the rise is enough to increase the unaffordability quotient of homes, especially in cities like Mumbai and Delhi, where home-buyers are already struggling with the recent spurt in prices.
In cities like Pune, Bangalore, Chennai and Hyderabad, where consumers are more price-sensitive, developers will have greater challenge with increasing the prices, JLLM said.
"The service tax on homes comes at an inopportune time, since the revival in residential real estate is still in its early stages. Such a setback will present yet another stumbling block," it added.