Mr. Abhishek A. Rastogi[/caption]
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.
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Source: Tax Mantra[/caption]
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 | |
| Total Tax* | 5.15% | 0.65% | |||
| GST Regime | GST | 12% | Available | 12% | Available |
| Total Tax* | 12% | 12% | |||
Solicitor Amaresh Singh[/caption]
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.
