The Goods and Services Tax (GST) is a major indirect tax-related reform that will be rolled out from July 1. It will, to a great extent, eliminate cascading effect of taxation and subsume many indirect taxes including VAT, Service Tax, Excise duty and Entry Tax. Removal of multiple taxes with one single GST will also pave the way for reconciling many interpretational issues. The real estate sector performs the role of a growth engine in an emerging economy like India with its indomitable capacity to generate high-volume jobs and contribute significantly to GDP. The big question, therefore, is will this change be favourable to the sector which is already witnessing stagnation, if not de-growth, for the last few years.
The real estate sector has been experiencing challenges from overall macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multiple indirect tax levies like VAT, Service Tax, Excise Duty, Stamp Duty and Registration Fees.
For a ready-to-move-in property, there will be no GST but buyers will continue to pay Stamp Duty and Registration Fee since GST will not subsume them. The sale of a building will be outside the ambit of GST if the developer receives entire consideration after issuance of completion certificate or after its first occupation. After July 1, will the price drop for ready-to-move-in property since it’s outside GST? The answer is ‘No’ because proportionate input tax credit will also be declined to developer for this exempted supply. Therefore, proportionate input tax becomes cost to him limiting the scope to pass on the benefit to consumer.
This also clearly reflects that ‘resale’ market may not have any impact from GST implementation.
The sale of land, we are aware, will not attract GST.
That leaves us to under-construction property. Over and above stamp duty and registration charges, buyer also pays Service Tax including Swachh Bharat Cess and Krishi Kalyan Cess @ 4.5 per cent of total value and VAT that varies from state to state within a range of 1 to 6 per cent.
This will be replaced by a GST of 12 where the land value is included in the total value of the property. So for the buyer, both tax and cost outgo will increase unless the developer decides to reduce the price. Currently the developer cannot avail input tax credit of excise duty that he has paid while procuring material. Since GST will subsume excise duty, he will avail this tax credit from July 1t. If we assume material cost as 25 per cent for a project that attracts 12 per cent excise, he will get 3 per cent input tax credit and should pass it on to consumers by reducing the price. The Government has specifically inserted Section 171 in GST Act to ensure anti-profiteering where the input tax credit shall be passed on to the recipient by way of commensurate reduction in price.
On the other hand, if the land value is significantly high (more than 1/3rd) in a project, developer can simultaneously enter into two agreements with the buyer wherein the first one will be for undivided portion of land which would not suffer GST and the second agreement will cover construction cost. While the GST rate will be 18 per cent for the second agreement, total cash outgo at the hand of buyer will come down generating savings for him. To further examine this option, one can refer the Supreme Court’s decision in L&T.
Renting of property for residential purpose will be exempted under the GST. However, renting of property for commercial purpose may either hold steady or decline marginally due to increase in tax rate from 15 per cent to 18 per cent.
For affordable housing, which has been a strong focus area of Government, services provided by way of pure labour contracts of construction, erection, repair, maintenance, renovation or alteration of a civil structure or any other original works pertaining to the beneficiary-led individual house construction / enhancement under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (PMAY) have been exempted under GST.
The other good news is services by way of pure labour contracts of construction, erection, commissioning or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex have also been exempted under GST.
The GST may throw both functional and technological challenges.
Functional challenges will include understanding transitional provisions to redesign supply chain strategy, formulating new business strategies covering inter-state supply and transactions with unregistered supplier, examining the impact on cash-flow and profitability and addressing sector specific concerns.
Technological challenges will be in creating a compatible system, capturing item level detail in invoices, building the trail of all amended entries, reconciling sales and purchase register with buyers and vendors in a time-bound manner and submitting multiple returns online. Readiness of the trained workforce will play an extremely important role in building a proper system of claiming tax credit in GST.
A small leakage on input tax credit can radically change the profitability of a project in a fiercely competitive market where the margin is clearly under pressure.
While prescribing the tax rate, the GST Council has tried to fit in existing aggregate tax liabilities in to GST rates and therefore, this will not generate any significant cost advantage to developers other than input tax credit. However, supply-chain efficiency with state borders disappearing may drive logistics cost down.
The GST has been designed in a manner that it will bring in lot of transparency with invoice level details being uploaded in system, easy availability of data through time-bound digital returns and high level of statutory compliances. With a streamlined procedure, it’s expected to bring down cash transaction with unregistered supplier because of reverse charge mechanism and eradicate lot of corruption by moving the data online and reducing cash component in the sector. The GST will surely provide a thread for audit and checks for better control and monitoring of this particular segment. And the major benefit will be hassle-free collection of taxes that will go a long way in building the nation.
This is time for Government also to critically look at other interpretational issues keeping in mind practical problems for end-consumers. One example could be valuation methodology. While stamp duty is calculated as per circle rate and the circle rates have not kept pace with the market dynamics, Income tax act has its own rule to value a property transaction and GST has brought in Section 15 to evaluate taxable supply clubbed with valuation rule. One standard method acceptable to all the authorities will bring much needed relief to the confused soul of buyer.
The other not-so-friendly provision that the Government has inserted in Section 17(5)(d) should be reviewed again. Input Tax Credit for goods and services has been denied for construction of an immovable property even to be used for business purpose. This will unnecessarily increase cost and may trigger inflationary pressure.
With GST coming in on top of Real Estate Regulation & Development Act (RERA), this sector will undergo rapid transformation and only the serious players will survive after a major consolidation. While the market will readjust to the new dynamics that GST will bring in, customer-centric approach and delivering the promises made will only help the developers to create a differentiated brand identity that will enable them to last in the long run.
Once the processes are streamlined and market becomes more transparent and disciplined after GST, the sector may attract lot of Foreign Direct Investment triggering unprecedented growth bringing cheer to both developers and buyers.
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