GST –Impacts & Hurdles
The implementation of GST is definitely seen as the sentiment booster for the real-estate market but the lack of clarity is a matter of concern. Realty Plus analysis the bearings of the new taxation regimen.
The Goods and Services Tax (GST) is highlighted as one of the biggest tax reforms in the history of Indian economy. The intent of GST is to remove the cascading effects of complex tax regime and to simplify the tax structure. Also, it will avoid overlapping jurisdiction between the Centre and states with regards to levies on services and goods. Furthermore, the Centre in November notified the GST Council’s latest revised tax rates on over 200 items, leaving only 50 items from 227 earlier in the 28 per cent slab. The building and construction materials have witnessed a reduction in the GST rates on some items like bricks, fly ash, coal &, iron ore (the raw materials for steel), washbasins, plywood and fire fighting equipment.
But the retention 28 per cent tax rate on cement and paint is a major disappointment for the realty sector. S Chouksey, President, Cement Manufacturers’ Association had said in a statement, “The Indian cement industry finds itself retained in the 28 per cent GST bracket, along with luxury items such as washing machines and air conditioners. “This is a disappointment for the entire industry as cement is integral to the government’s key schemes such as Housing for All, Swachch Bharat and building of other infrastructure projects that are fundamental for building an India for the future”. Another perspective corroborates GST council decision, keeping in mind the 5 per cent tax rate on cement industry raw materials like limestone, gypsum and iron ore which considerably lower the cement manufacturer’s material procurement cost. Also lower tax on transport sector could benefit cement companies with lower freight costs.
Impact on Developers
GST will help in reduction of the cash component in construction as inputs will now have to be procured from registered vendors. In the long run this will ensure transparency in the real estate ecosystem. Thus, the liability to pay taxes has been shifted from the provider of goods and services to the receiver. Any purchase from an unregistered dealer will attract a reverse charge on the recipient which adds to the compliance cost of the purchaser.
There is no input tax set off available for the stamp duty paid for the land, Stamp duty and registration charges are outside the ambit of GST because these are state levies while property tax is a municipal levy.
Abhishek A. Rastogi, Partner, Khaitan & Co, said, “There has been a substantial simplification of compliance as the tedious requirements of filing numerous forms with various central and state tax authorities have been simplified, reducing the resources developers will need to dedicate towards that end. There has also been simplification of tax rates. While calculations could get overly complicated under the earlier tax system due to separate application of VAT, Service Tax and other additional taxes on ancillary supplies & labour, treatment of works contracts as a pure supply of services with a uniform applicable rate under.”
The under-construction properties will now be taxed at 18% which includes 9% SGST plus 9% CGST. The government has also allowed deduction of land value equivalent to one-third of the total amount charged by a developer, thus, making the effective tax rate as 12%.
However, increase in prices of land which is an immovable property has made it difficult for the developers to buy land from owners, thereby giving rise to Joint Development Agreements (JDAs). GST seeks to consider all forms of sale, transfer, barter or disposal as a supply subjected to tax, sale of land and buildings have been kept out of the ambit of GST and taxability of transfer of right to develop is a subject matter of interpretation and needs to be addressed.
Construction Services Taxation
As per the new GST regime, construction services are taxable at 12 per cent. Input tax credit is disallowed on construction services and construction of complex, building, civil structure, including a complex or building intended for sale to a buyer, wholly or partly, attracts a GST rate of 18 per cent. But, fully constructed properties with completion certificate are exempted from GST.
The government has fixed 18% GST for under-construction properties, and it has allowed deduction of land value by the developer, making his effective tax rate 12%. But the subcontractor has to pay full 18% which cannot be passed on to the developer and thereby to the final consumer. Developers are quite unhappy with this discrepancy. Also, as stamp duty and registration charges are non-creditable, these gets embedded in the cost of the property for the buyer – which in turn results into tax cascading and other inefficiencies in the supply chain.
Impact on Affordable Housing
The government has reduced GST rate on work contracts for affordable housing to 12 to 18 per cent. CREDAI president Jaxay Shah said the new rate is only for work contractors. If a developer involves a work contractor for his project, his cost will be reduced by 6%. But in the affordable segment, developers construct projects themselves to be cost-efficient. Therefore, the cost for developers will remain the same.
Moreover, affordable houses which were earlier almost completely tax exempt shall now be liable to 12 per cent tax. Though the input credits shall now we available, it is unlikely to completely offset the increase of 11.35% in tax rates.
|Normal Real Estate||Affordable Housing|
|Current Tax Regime||Particulars||Tax Rate||Input Credit||Tax Rate||Input Credit|
|Service Tax||4.5%||Not Available||Exempt||Not Applicable|
|VAT||0.65%||Not Available||0.65%||Not Available|
*Stamp duty has not been considered
With the implementation of GST, the government has expectedly settled the most contentious – dispute related to classification of taxable real-estate supply. The GST law treats construction of a complex, building, civil structure as well as works contract services when supplied for construction of an immovable property as a supply of service.
Disputes, however, could arise on account of tax treatment of under-construction projects, and whether or not the developers are able to pass on the benefits of input credit to the buyers by way of a commensurate reduction in prices. The National Anti-profiteering Authority – set-up under the GST law – is mandated to ensure that the benefits of lower taxes under the new regime are shared with consumers.
Legal experts are of the view that inflationary pressures and lack of clarity on various provisions will make compliances difficult in the first one to two years, but, seeking redressal of a taxation issue would become far easier because of the uniformity of rules.
Solicitor Amaresh Singh, Partner, Luthra & Luthra Associates explaining the compliance issues for the developers said, “The overall compliances required to be undertaken by the developers in the GST regime have come down substantially. Compliances have been streamlined to include monthly and annual returns. Besides, in the GST regime, all the compliances have to be undertaken electronically without any physical interface with the tax authorities. Certain compliance challenges in the form of technical glitches faced in the filing of the returns, modification of data, non-reporting/duplication of data between different returns for the same period etc. still persist. It is precisely because of a slew of software issues with GSTN – which if not resolved in time – that the developers will start feeling the pinch on account of blockage of funds and in turn their working capital requirements.”
Impact of GST on home buyers
When a developer sells a house, GST is calculated at 18% on the two-third value of the house. The net rate would be 12% of total price of the house. The abatement of one-third of the value of the house accounts for the land price, which neither comes under goods or nor services category.
On the face of it, the increase in the tax payable by home owner gets offset by the input tax credit if GST is paid. However, as the entire burden of GST is borne by the end consumer, the overall cost of the home will become much higher. In response, the developers are likely to reduce the per-square-foot rate to boost consumer sentiment. The apartment sizes too are shrinking to keep the ticket size reasonable for majority of home buyers.
However, GST is not applicable to ready-to-move-in properties. The developers will have to bear the tax burden for ready-to-move in projects. Property brokers are already finding buyers leaning towards ready-to-move in properties though they are likely to cost a bit more but are almost at par with under construction properties post GST.
Another major concern – especially in cases where the land cost is more than 1/3rd of the price charged from the buyer – is the blanket deduction of 33% from the total value of the apartment for the purpose of determination of transaction value for levy of GST.
While the cost of construction largely remains the same, the land value varies significantly between tier one and tier two cities or semi-urban area. Given the high cost of land in cities like Mumbai, Delhi and Bangalore, this overarching deduction of 33% as land value – irrespective of the actual share of land value in the price of the apartment – increases the overall cost of the project. This negatively impacts the builder as well as the consumer.
No GST on Rental Income
According to the provisions of the GST Act, renting out of an immovable would come under the ambit of GST as it is treated as supply of services. However, the government has given relief for the properties rented for residential purpose. GST would not be applicable if the property is rented for residential purpose. The rental income earned by the landlords who are letting out their properties for residential use is exempted by the GST.
However, if the property is rented for commercial or industrial use, then it attracts 18 per cent GST if the rental income is over Rs. 20 lakh annually.
Brokerage services are subject to GST at the rate of 18% provided the broker’s annual income (from provision of services) exceeds Rs 20 lakh.
The Anti-Profiteering clause
The Section 171 of the CGST Act makes it mandatory to pass on the benefits of the input tax credit to the consumers by reduction in prices. If a builder does not pass the ITC benefits to the buyers, a complaint can be lodged with the National Anti-Profiteering Authority (NAA). This Authority is the institutional mechanism under the GST law to check the unfair profit-making activities by the trader community. The Authority acts like a watchdog and has the powers to take action against the builders if they do not pass the ITC benefits to the buyers.
The high component of tax credit means the tax burden on the consumer is lower than the earlier tax regime. Under the previous tax structure, the Input Tax Credit of earlier taxes was not allowed for the payment of Service Tax or VAT on construction of flats. Therefore, it led to the cascading of input taxes like VAT, Entry Tax, Central Excise Duty, etc. These taxes on construction materials were borne by the builders who ultimately passed it on to the consumers in the final sale amount. This system has changed in the GST structure. The developers are getting a big input credit which results into reducing the overall price of the flats.
Inference & Concerns
The Quikr Homes survey indicates that 41% builders believe that the implementation of GST has not simplified their business operations, whereas 21% feel it has brought much-required transparency and accountability to the industry. However, another 38% are not sure about how it would play out in the long run.
For instance, developers are sighting many reasons not to pass on the lower tax benefit to the consumers. Increase in compliance cost, higher input costs, change in business strategies are some of the reasons developers find to justify themselves. With the Anti-Profiteering law, the developers have to come with a reasonable justification as it can also impose penalty on the defaulting business or cancel its GST registration.
Also, Bihar Finance Minister Sushil Modi, member of the GST council, has indicated a possibility of bringing Stamp duty and Registration charges that vary from state to state under the ambit of GST. The stamp duties are earned by the state governments while the registration fees are levied by the local bodies. But, there is no clarity on how the centre will compensate the states.
Home buyers and investors too are understandably concerned on the increase in the final ticket size of homes with levy of 12 per cent GST. But, there is no doubt that GST will be a game-changer for the real-estate sector, since it subsumes more than 16 major taxes and levies into a single consolidated tax. It is now creating level playing field for organised entities as the unorganized players too will now come within the tax ambit.