Valued added tax (VAT) imposed on housing and apartment construction is applicable only to contractors and not the developers and hence must not impact prices, the Finance Ministry has said. The clarification from the ministry followed after ambiguous language in the budget statement made the realty market anxious. The finance minister on Monday had announced imposition of VAT on construction of housing units and apartments valued at over Rs 5 million, and developers and other players said the decision would lead to prices shooting up. Likewise, the ministry has informed that capital gains tax imposed on land transactions has multiple rates. It is 10 percent in case the land is sold within five years of possession and five percent if the duration of landholding exceeds five years. Clarifying the statement, Shanta Bahadur Shrestha, Director General of the Inland Revenue Department, stated that the decision did not add more tax, but only made it mandatory for contractors constructing buildings in the interest of the people to register with VAT. “VAT is already effective on materials employed in such constructions. So, the decision should not impact sales price,” said Shrestha. He stated that the step was taken after the department realized that revenue leakages were resulting from poor compliance by contractors. However, contrary to the government´s claim, contractors argued that the decision will still raise the price of apartments by around 6 percent. “Prices will go up because the decision has made VAT applicable on the final cost of construction, including labor and other costs, which were hitherto free from VAT,” said Ramesh Sharma, managing director of Sharma and Co, adding that cost of labor and VAT exemption items make up some 40 percent of the total cost. Builders, however, admitted that the new arrangement will raise revenue collection by the government and also ensure the quality of construction. As for the CGT on land transactions, officials stated that differential CGT rates were fixed because frequent sales reflected the commercial interest of landholders whereas transactions done after five years reflected non-commercial sales. “This should not raise the price of land, as the tax is applicable only for sellers and on the profit margin,” said Shrestha.
Source: Republica