New Value Added Tax is Going to Hurt Investors and Homebuyers

By Vipin Agnihotri

Even as the Indian government talks of affordable housing, they have come up with the Value Added Tax (VAT) of five percent for sale of flats under construction. This five percent would be levied on the sale price of the flat. In my opinion, the Value Added Tax on sale of under construction units would hurt investors and homebuyers.

It is worthwhile pointing that with this move the poor buyer has to pay a stamp duty of 5 percent. In addition, he will also have to cough up 5 percent more as VAT if he purchases a flat during the construction stage. In other word, he would thus end up paying double taxes on a single purchase transaction.

“The move is a big blow considering the fact that around 90 percent of the flats are booked during the construction stage,” pointed out Reema Sen, real estate expert. When we asked government officials in this regard they said that VAT is applicable on goods involved in construction such as cement, steel and so on.

Most of the housing industry experts feel that the decision to levy 5 percent VAT on property under construction is illogical and perverse. I agree with them because property is an immovable commodity and VAT cannot be charged on it. Generally speaking, it is a burden on the buyer and is a kind of double taxation.

“We expected that the government would reduce stamp duty charges for purchase of flats from 5 percent to 3 percent. Instead, the government has now decided to levy VAT of five percent on sale of flats. We are now forced to transfer the burden to flat purchasers,” pointed out Raghuvar Dayal of Raghu Properties.

There is no doubt in my mind that the 5 percent VAT will definitely have a marginal negative impact on pre-sales as investors may choose not to acquire an asset during the construction or pre-construction stage and expose themselves to a double tax exposure in the bargain.

In theory, there are chances of an MOU being executed between the flat purchaser and the builder, which need not be registered. According to experts, they may then choose to acquire the same asset, once ready for occupation, by paying only the stamp duty component on the sale agreement. This in turn will have a bearing on the liquidity of small-time developers, who normally fund the construction of their projects with the money received from pre sales.

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Poor pace of reforms in the power sector, cause of concern for India

By Vipin Agnihotri

Lucknow, India: Indian Prime Minister Manmohan Singh has called for a crash programme on increasing India's generation capacity. There is no doubt that poor pace of reforms in the power sector will trip overall economic growth and there is an urgent requirement to check electricity theft that is bleeding the system.

According to Prime Minister Manmohan Singh: “There is general agreement on the requirement to rapidly minimize transmission and distribution losses. If we expect the economy to keep growing at 9-10% per annum, we need a commensurate growth in the power supply. I request all chief ministers to launch a campaign against theft in their states.”

Experts believe that, time is running out, and unless India is able to arrest the growing shortages, the effect on economy may well prove disastrous. Even worse, India has not been able to make a decisive breakthrough in ensuring high and sustainable rates of growth of this sector and improving its financial health. It is worth mentioning in this regard that the present level of losses in terms of transmission and distribution, ranging between 30-45% in lots of states, threatens the financial health of the sector. A big proportion of these losses are because of theft. In other word, theft is the cancer of the power sector.

There is also some concern over the slow pace of capacity addition, given that only half of the 41,000-mw targets could be achieved in the 10th Plan. Taking this into account, Prime Minister announced setting up of a dedicated, professionally managed National Power Project Management Board to keep track of 11th Plan projects.

In addition, Manmohan Singh also announced setting up of a task force to develop hydel projects and look into issues of rehabilitation and resettlement of affected persons. “States and the Centre had every right to intervene decisively in case the sector regulators did not take measures strictly in consonance with public interest,” pointed out Manmohan Singh. The best part about this statement is that the law is quite clear on this. Regulators should regulate - but not over-regulate. As a matter of fact, they should not become parking places for retired bureaucrats.

To look at issues affecting the power sector, a standing group of power ministers was set up, identical to a grouping of state finance ministers on VAT. “With over Rs. 6,00,000 crore investment needed during the 11th Plan, setting up a sub-committee of the standing group to look at financing issues, particularly for upgrading transmission networks is quite mandatory,” pointed out official at power ministry.

While the standing group would be headed by power minister Sushilkumar Shinde, the sub-group would be chaired by Finance Minister P Chidambaram and include deputy chairman of plan panel Montek Singh Ahluwalia. "I expect this sub-committee to finish its work in three months," Manmohan said adding that the sector needed a "crash programme" for capacity addition to get rid of shortages by 2012 and pegged the investment needs at over Rs. 6,00,000 crore during the 11th Plan period. Whatever be the case, one thing is for sure, sector's inability to lure private players on a big scale is a serious concern.