Developers in Mumbai said Maharashtra’s tax surcharge on home sales to fund metro and road projects will hurt demand when the market was showing signs of revival.
The 1% surcharge is over and above the 5% stamp duty and 1% registration fee on ready properties. For under-construction apartments, buyers have to pay 12% goods and services tax—taking the total levy to 19% of the cost of an apartment.
“Housing is a basic need but the government has taxed it like alcohol and cigarettes,” said Niranjan Hiranandani, Co-founder and Managing Director, Hiranandani Group, and President, National Real Estate Development Council. “The bill goes completely against the government’s affordable housing push.”
The increase in stamp duty comes when defaults by IL&FS group have dried up liquidity for non-bank lenders, the key source of funds for property developers. That could hurt a rebound as the new launches had started picking up after the twin disruptions of the note ban and a new housing law. The Supreme Court also temporarily lifted a two-year ban in March on the construction of new buildings in Mumbai, India’s second largest property market. Fresh projects surged 128% on a yearly basis in January to June, according to a Knight Frank India report.
Still, a sustainable recovery is still far. Sales grew by just 1% in the first half. And it could have been much worse, the report said, if not for a slew of incentives and discounts offered by developers to reduce prices.
The Maharashtra assembly on November 27, 2018 passed the Mumbai Municipal Corporation Act (second amendment) Bill. Once it gets the governor’s assent, all buyers will have to pay the surcharge of 1% on the value of the property sold, leased, mortgaged and gifted in India’s financial capital.
“This will hurt the buying sentiment and sales might fall and would add to existing real estate woes and liquidity crunch in the system”, said Rahul Shah, Chief Executive Officer, Sumer Group.
The government decided to levy the surcharge as it has limited resources to raise money, an official of the Urban Development Department had earlier said. The stamp duty across Maharashtra is 6%, barring Mumbai where it’s 5%. So, it will be brought on a par with the rest of the state, the official said.
At the end of each year, Maharashtra will contribute grant-in-aid equivalent to collections from the surcharge to the municipal corporation. The funds, according to the objective disclosed by the government, will be used to build metro, monorail, freeways, and sea link.
“The real estate in Maharashtra is already overtaxed, and the government needs to find other sources of revenue to fund its projects,” said Ashok Chhajer, Chairman and Managing Director, Arihant Superstructures. “The move will deepen the crisis in the property market and make business unviable”, he said.
Ajay Jain, Chairman and Managing Director, Monal Capital agreed with the statement and said, “The marginal growth in sales is likely to reverse in the second half of the year due to an increase in prices. The sales may further fall 10-15% in the short-term before reviving again by April when holidays start and people move to new homes.”
About 70% of the total sales in the first half of 2018, according to Knight Frank, came from low to mid-segment markets, such as central and western suburbs, Thane and Navi Mumbai. Buyers could afford better homes with additional facilities like clubhouses in these areas. The surcharge, Hiranandani said, will impact this segment the most.
“We are going back to the time when low-income societies lacked amenities such as swimming pools and playgrounds,” Chhajer said. “The profit margin for most real estate developers has already reduced by half in the past two years. A further increase in taxation would affect the quality and design of low-priced houses in the suburbs.”