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Negative List Taxation: Good or Bad for Property Sector?

10 Oct 2012

The industry at large may have been criticised for the introduction of the new comprehensive regime of taxation of services, due to higher incidence of taxes under the current environment. However, it is turning out to be a blessing in disguise for the hard hit real estate sector, which is suffering from the global crisis, high interest costs and rising cost of inputs. Taxand India discusses whether or not the new negative list based taxation regime will be beneficial for the real estate sector.

As opposed to the previous service tax regime, the real estate developer would now be eligible to avail the credit of service tax and duty paid on procurement of services and capital goods even where they opt for payment of service tax under the abatement scheme. Although this is a real advantage for the sector, there are some challenges as well.

Under the new regime the taxability of a service containing element(s) of 2 or more services would need to be determined in terms of the concept of bundled services. Therefore where elements are considered as not naturally bundled in the ordinary course of business, the company would not be eligible for abatement scheme (ie reduction in service tax liability by 75%), and would be subject to service tax on full value at 12.36%.

Similarly, given the wide coverage of the definition of 'service' under the new regime and the intention of the government to tax non-monetary consideration, taxability of transfer of development rights by a land owner to a real estate developer, in terms of the joint development agreements, poses a new challenge of determining taxability of such transactions.

Discover more: Will the taxation of services be a boon or bane for real estate sector?

Your Taxand contact for further queries is:
Abhishek Goenka
T. +91 80 4032 0100

Taxand's Take

The Government's move to replace the positive list based taxation scheme by negative list based taxation scheme will surely be welcomed by the real estate market on account of eligibility of credits at input which directly leads to better bottom line for companies operating in this sector. However, the new service tax regime poses its own challenges for the real estate sector, as it necessitates fresh examination of the settled tax positions of law in order to have certainty of taxes and comply with the new law.

Taxand's Take Author