Impact of GST on the Real Estate Industry

The GST gusto has been inviting much debate, discussion, and prognostication by experts all over, making it a ubiquitous part of our trade and commerce lexicon. Five months after the promulgation of the GST, there is still some obvious air of uncertainty. The initial few months of GST have been a ro

BY admin
Published - Jan 24, 2018 5:03 AM

The GST gusto has been inviting much debate, discussion, and prognostication by experts all over, making it a ubiquitous part of our trade and commerce lexicon. Five months after the promulgation of the GST, there is still some obvious air of uncertainty. The initial few months of GST have been a rollercoaster ride with many sleepless nights for various stakeholders. Nowhere the muddle is more apparent than the real estate sector. Traumatised by the enactment of the Real Estate (Regulation and Development) Act (RERA) and demonetisation, the players are now grappling with several GST issues which may take some time to settle. At present, GST is applicable only on limited supplies in the real estate sphere. While sale of property in under-construction projects is treated as a pure supply of service and chargeable to GST, sale of completed property remains outside the purview of GST because of a specific exemption for transactions involving sale of land and building. This anomaly in tax treatment arises because of the unique nature which provides for state stamp duties. Stamp duty, which is a huge source of revenue for the states, has not been subsumed under GST whereas GST remains applicable on the input side for procurement of raw materials and labour. The moot point remains whether immovable property will be included within the GST, thereby subsuming stamp duties, and whether this can be achieved without an amendment to the Constitution. In addition to existing the woes of the developers, the retention of high tax rate on cement was another setback faced by the sector. This is detrimental owing to prohibitive cost of inputs which is hindering the sector and refund of inverted duty is also denied in various cases. Unfortunately, the anti-profiteering provisions may be of limited relevance to this sector as there may not be any reduction of tax brunt. This does not augur well for new home buyers. Further, transfer of development rights is a bone of contention for the real estate sector. Substantial increase in prices of land has made it impossible for many builders to purchase land from owners outright, thereby giving rise to joint development agreements under which the land owners get initially identified consideration and built up units. 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. The transition into GST has not been hunky dory, with several open issues plaguing the sector. Input tax credit is disallowed on construction services resulting in immovable property in situations where the sale is executed after obtaining the completion certificate or after first occupancy.  This dichotomy thus leads to higher costs and prevalent confusion in the market on the applicable rate of tax. Further, during the transitional phase for the under-construction properties, there was a tax incidence of the erstwhile taxes on procurements. However, subsequent to GST cut-off date, GST on supply would be applicable. As a corollary, the input taxes of the erstwhile regime, prior to cut off date, may not be completely utilised for set-off with GST as there are no explicit provisions for the transitional credits. On the other hand, the new tax regime has ushered several positives for the sector. GST has reduced the cascading effect of taxes to a considerable extent and allowed ease in utilisation of credit by developers. Moreover, the sector is forced to rehash its course by discouraging illicit practices relating to cash transactions and copious amounts of unaccounted project expenditure which goes unrecorded in the books. Developers are required to recalibrate business practices because of the invoice matching process under GST. This move is expected to nudge errant businesses towards better compliance sought to be enforced through the sectoral reform. From the perspective of developers, there has been substantial simplification of compliance. 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 GST is a welcome move that will provide much needed certainty during planning and implementation of projects.  Deferring tax payment under reverse charge for procurements made from unregistered dealers until 31 March 2018 provides further relief to the real estate sector. The Finance Minister Arun Jaitley recently set the ball rolling for a major reform in real estate sector by publicly expressing his desire to bring the real estate sector entirely within the purview of the GST. Bringing real estate under the purview of GST would entail tax being charged on the sale of completed buildings as well, thus bringing uniformity in the taxation structure. The move may largely resolve credit related issues faced by developers who would be able to pass on the credit benefits to consumers by commensurate reduction of prices. The road to bring real estate under the ambit of GST is long winded, requiring a constitutional amendment along with numerous legislative changes to the GST Acts. The government, while considering any such move should be mindful of local levies such as stamp duty, property taxes and other invisible levies such as cesses on labour and land under construction, which add to the costs of projects. GST cannot be imposed over and above these local levies since that would amount to double taxation. Consequently, these levies must be subsumed within the GST with appropriate adjustment of tax rate. While the GST Council is proactively acting to address issues of the real estate sector, there is a high likelihood that the constitutional validity of various provisions will be challenged in High Courts. These include adhoc deduction of 1/3 towards the value of land as arbitrary because in various cases the actual land value could be much more. Further, the sub-contractors rendering services to the main contractor in various cases could be much more than the output tax rate, thereby leading to tax cascading. The refund of inverted duty structure is specifically restricted for real estate transactions and may result in arbitrariness. Transitional credit provisions remain arbitrary and the issue of supplies used for WIP of projects may reach Courts. Another interesting aspect is that anti-profiteering provisions could be challenged at this stage by the developers before the buyers invoke these provisions against the builders. A pessimistic view might say that tax reforms till today have been a dreamless dream since slight tax increases can cost us a whopping fortune and substantial tax cuts save only a few cents. But GST ushers a hope to come as a silver streak in the history of taxation in India. Perhaps, it is time again for us to hold our horses and wait for the next broadcast. These are indeed interesting times ahead!

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