The finance minister's Budget proposals for the real estate sector has evoked a mixed reaction. Inclusion of lease rental income from commercial business in service tax net may have a marginal negative impact for companies in commercial segment as lease rental agreements have provisions for tax increases. However, in the longer run companies may not be able to pass through these tax increases. Moreover, extending service tax on rentals received from immovable property could really be counter productive. Mr Pranay Vakil, chairman, Knight Frank said, “It is possible that the tenant/occupant may refuse to pay the service tax at 12.5pct of the rent and the owners may be required to absorb this increase. This will lower the owners' yield significantly and a typical investor may be driven to divert his investment to other asset classes than real estate. Also the domestic real estate venture capital funds that have already put money into income yielding assets will suddenly find the income going down by 12.5pct." Edelweiss Research in its analysis, observed that non-extension of benefits under section 80IB has been negative for the real estate sector. Company NAVs would get revised down. Profit & Loss impact would be felt only later, as most developers get approval for their projects from local authorities 2-3 years in advance.
The Financial Express New Delhi Edition March 3 2007