Decoding GST for Realty

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As Goods and Services Tax (GST), one of the biggest tax reforms in the country rolls out, the real-estate players look forward to its impact clubbed with recently introduced RERA on the sector.

After initiatives like “Housing for all” and RERA, GST is all set to go a long way in ensuring efficiency in the realty sector. GST will free homebuyers and investors from the hassle of paying several state taxes at different levels, therefore removing the double taxation impact.  It will also help cut cash component in construction, as inputs have to be obtained from registered vendors to get input tax credits. GST is likely to boost foreign investment and benefit the NRI community for investment in real estate because of the simplification of taxation. From the consumer point of view, the major advantage would be in terms of decrease in the overall tax burden on goods which is currently estimated about 25%-30%.

While the impact of GST on various sectors and goods is now known, industry experts are still divided over how GST will impact real-estate going ahead as clarity on the tax slabs for services is still awaited.

Sukhraj Nahar, Chairman and Managing Director of Nahar Group elaborated, “GST would help cut cash component in construction, as inputs have to be obtained from registered vendors to get input tax credits. The construction of a complex building, civic construction is under 12 percent tax bracket with full input tax credit (ITC) subject to no refund in case of overflow of ITC and the better efficiency in logistics should also help reduce prices of good. But, if we talk about nitty-gritty’s of the GST , in some cases, even input credit will be more than the GST levied on the finished product, but a developer can claim a maximum credit to the extent of the GST he would be paying on the finished product. As per the provisions of GST, it can be expected that GST may lead to input cost deflation for construction industry as credit of taxes paid on various inputs used in the construction activities will be available which is not available in current tax regime.”

Brijesh Verma, Resident Partner and Co-Head, Indirect Taxes (GST), Kochhar & Co cited an example of the mixed result of GST and the challenges, “The major challenge will be the availability of credits. For example, a builder constructs 100 flats out of which 50 are booked. The developer has already purchased the construction material on which he has paid VAT and it also imbeds an element of central excise for which he doesn’t have the central excise invoice. With the implementation of GST, as the project is partially complete, he should ideally get the credit when he is being charged at 12 percent on his output instead of 4.5 percent. Though it can be said that the burden of additional 7.5 percent will be on the customer but this makes the project unfavorable among buyers.”

Construction Costs

A vast majority of construction materials have been placed in the 28% tax slab (slightly higher than current tax rates), hence the cost of internal fittings such as ceramic articles, tiles, granites, amongst others may go up marginally; an increase that might be transferred onto buyers. An exception to this will be residential projects launched under the PMAY which have been exempted from the ambit of the GST.

The Council has allowed for 100% Input Tax Credit (ITC) on the raw materials and services used for such construction activity. This will encourage transparency, increase tax compliance and reduce dependence on cash because the ITC can only be availed if raw materials are sourced from GST registered vendors; even though the sector might take its own time in adjusting to the new guidelines, given the extent of unorganized segment in the industry.

Anshuman Magazine, Chairman, India & South East Asia – CBRE India  is of the view  that as a large majority of goods used in the real-estate and construction segment are sourced from vendors operating in the unorganized space, identifying value additions at each stage for evaluating input tax credit is likely to be a challenge. “While the government has done its best by bringing in the regulation at the right economic cycle (low inflationary period), however the industry will need some time, before it completely understands the implications of the tax rate on operations and compliance.”

Under-Construction & Completed Properties

Under GST, an under-construction property is covered under works contract and classified as a service. The GST Council has decided to tax construction of a complex, building for sale to a buyer, wholly or partly, at 18%, which may lead to an increase in the cost of under-constructions properties. However, partly addressing the need of the industry to exclude land from the value of computing GST; the 18% tax would be chargeable on only two-thirds of the under-construction property value, which brings the effective GST rate on under-construction properties to 12%. Since completed and ready to move in properties cannot be classified as a service, both have been kept out of the purview of GST. Stamp duty and registration charges have also been kept out of the ambit of GST.

Residential & Commercial Segment

Impact of GST may vary according to the type of project and construction methods as only under construction flats are taxable under GST and input credits on sales of under construction flats are available to set off. Rental income from residential properties used for residential purposes would continue to be exempted under the GST regime and such properties were also exempted from service tax previously. Leasing of commercial, retail and warehousing properties has been put in the 18% tax slab, as compared to the current service tax of 15%. This is likely to increase the occupancy costs for occupiers in these segments. “Developer or Promoter has to collect taxes from customers from time to time and he is eligible to take input tax credit on goods as well as services used for construction activities. GST will help cut cash component in construction as products have to be sourced from registered vendors to get input tax credits,” added Sukhraj Nahar.

Affordable segment:

Currently under VAT system in Maharashtra, tax exemption is not available to affordable housing scheme. It is expected that there will be no tax under GST on housing projects as well as on inputs and input services used for projects which comes under affordable housing scheme. This will ensure cost inflation impact is not passed by promoters / developers to customers who purchase residential units under the affordable housing scheme.

Brijesh Verma stated, “There are concessions and exemptions for the scheme of affordable housing in terms of service tax but there is no such exemption under the GST law. Government might take the route of refund to the customer i.e. the taxes and credits levied will be refunded to the customers. In case of beneficiary led individual house construction enhancement under the Housing for All or Pradhan Mantri Awas Yojna, the pure labour contracts are exempted, but the material used will still be taxable. Therefore, the Government nodal agency, development authority or a housing board might purchase the material on their names and engage the contractors.”

The challenges and solutions highlighted by National Real Estate Development Council (NAREDCO)

1. Given the fact that the GST Law has proposed to tax sale of under-construction real estate property at 12% on the total sale value, in addition to the stamp duty levied around 6% on the sale value, the tax burden is likely to increase to 18%, thereby, hugely impacting the cost of property.

Suggestion – Land deduction should be allowed under the GST law for taxability of the sale of real estate property and the GST rate for sale of under-construction property should not be more than 6% on the agreement value.

1. It is a known fact that builders acquire land on long term lease for the purpose of development and construction of building on that land and later offer to give the constructed units on a long term lease for a consideration which is a lump sum amount of the premium. However, under the exemption made available under GST, only premium charged for any lease of 30 years or more to any industrial unit or plot is exempted.

Suggestion – A similar exemption needs to be extended in all cases (residential/housing plots and others) for any purpose.

1. Under GST law, only sale of land and sale of building (i.e., after its completion) is exempted and grant of development rights is not included.

Suggestion – It should also be included under GST on the basis of the exemption granted for sale of land as it is well-recognized in law that property is a bundle of rights whereby the property can be transacted by transfer of any or all rights and development right is one of the constituent of such a bundle of rights.

1. Since the tax burden is likely to increase to almost 18% on the purchase of housing property, the common man may find it difficult to afford the additional tax burden. The increase in tax shall tentatively come out to be around 4% besides existing tax in affordable housing projects, so for the general benefit.

Suggestion – Exemption should continue to be provided for affordable housing projects as well as single residential units.

1. On one hand, GST is sought to be levied on a completed commercial immovable property renting; on the other hand, input credit on such construction is disallowed possibly on the presumption that after completion of construction there is no GST applicable. Keeping in mind the fact that one of the primary objectives behind the introduction of GST Law is to enable seamless flow of input tax credit across the value chain.

Suggestion – Input tax credit of construction of property for renting/leasing purposes should be allowed.

Last but not the least; clarity is required on the taxability of PLC and parking charges.

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