The government had last week clarified through the Budget that transactions such as leasing vacant land and commercial spaces, payment made to developers before the grant of completion certificate and imposing preferred location charges, among others, would come under the service tax net.

Developers said the proposal could push home prices up by 10 per cent in Tier-II and Tier-III towns and 0.5-4 per cent in big cities such as Mumbai and Delhi which have higher land prices. However, a senior finance ministry official here said the net impact of the service tax would be only 3.3 per cent, since there is an abatement of 67 per cent.

"There is a false impression being created that prices will go up by 10 per cent but the fact is that 10 per cent service tax is levied only on 33 per cent of the value," said the official.

The budgetary clarification has been issued with retrospective effect from 2007, when real estate transactions were brought under service tax. Abatement scheme, under notification number 1/2006 dated March 1, 2006, says that the contractor is entitled to claim abatement to the extent of 67 per cent of the value of services rendered by him. In effect, the contractor would have to pay service tax only on 33 per cent of the value.

Stung by new service tax proposals on property transactions, real estate bodies such as the Confederation of Real Estate Developers Associations of India and Maharashtra Chamber of Housing and Industry plan to approach the finance ministry to seek rollback of some proposals.

Developers have already increased prices by 15-20 per cent in the last nine months as demand for homes picked up. This resulted in demand tapering in January and February.