Additional Service Tax Burden on Indian Realty Market – Who Will bear It


Who will have to bear the burden of the increase in excise duty and service tax (2% each to 12% from 10%) proposed in the budget? The developers are in all likelihood going to pass on this cost to the home buyer.
Some builders have already gone on record to say that they will pass on the service tax burden to existing buyers and not the excise duty hike as the buyer-builder agreements were signed earlier and that new buyers will have to bear the brunt of both the additional costs.
Is it legally permissible?
Legal experts point out that the builders are within their legal means to pass on the burden of the escalated costs to the buyers provided the contract signed between the builder and buyer says so. It, therefore, depends entirely on the contract that the buyer has with the developer. The question whether a developer can pass down the burden of an increase in costs can be viewed from multiple perspectives.
Firstly, an increase in excise on building materials is not a tax on the final product (ie flat) that the builder has charged the buyer for.
Secondly, the builder-buyer agreement is a contract where the parties have agreed to sell/purchase the flat for a specific cost price.
“The clause on `escalation in price’ usually mentions a specific percentile hike in price which can be recovered from buyers. The `unforeseen circumstances’ clause would warrant being invoked in a situation involving a significant price hike, such as the price increase for cement and steel a few years ago.
The norms governing the price hike intervention have been laid down by courts and demands made by any sector would have to satisfy the norms so laid down,“ says Vivek Kohli, senior partner, Zeus Law Associates.
Check your contract According to the tax practice group at Amarchand & Mangaldas & Suresh A Shroff & Co, any increase in taxes on the inputs such as cement etc required by the builders would lead to increase in cost of construction for such builders, especially when such taxes paid on the inputs are not available as Cenvat credit to the builders. However, the ability of a builder to pass on the burden of escalated cost to the buyers would be dependent on the contractual arrangement between the parties.
Whether the buyers will have to take on the additional burden also depends on the change in law provision used in some contracts, adds another lawyer who does not wish to be named, adding buyers should be aware of such clauses when they sign the builder-buyer agreement.
Source  – TOI


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