In India, year 2017 is likely to be best remembered for ushering a new tax regime – GST, which replaced plethora of age-old 17 Central and state taxes and 26 cesses. GST was seen as a tax which would liberate the taxpayer from the evils of cascading, multiplicity of levy, unwarranted litigation, compliance burden etc. amongst others.
One sector which was looking up to GST as a panacea for all its tax woes was real estate.
Off late the real-estate sector has been saddled with too many stumbling blocks such as coping up with regulatory changes (RERA) slowing domestic economy, geopolitical uncertainty etc.
Amongst 190 countries, India ranks a lowly 185 in dealing with construction permits and 138 in registering property in the World Bank’s ease of doing business index. The average time taken to acquire a land is 14 months.
Knowing that the aforesaid challenges would take time in ceding, the real estate sector was expecting that GST would provide some impetus to the sector by liberating it from hidden tax costs, black money transactions, multiple assessments, audits and tax procedures. It was expected that GST would make the paradigm shift from favoritism to transparency and from discretionary administration to a policy and system based administration.
It would be interesting to evaluate if the above expectation has been met.
Firstly, GST has undoubtedly assisted in formalisation of the sector to some extent. Not obtaining GST registration and evading tax by remaining outside the tax net, is no more a lucrative option. It makes sense for stakeholders like suppliers of building material, works contractor etc. to register themselves and avail the benefit of input tax credits.
As a large majority of goods used in the real estate and construction segment were sourced from vendors operating in the unorganised space, benefit of availing input tax credit at each stage has encouraged them to come within the tax ambit.
Secondly, GST has been successful in liberating the sector from multiple levies like excise and VAT on manufacture/ procurement of goods such as cement, steel, bricks etc, service tax on construction, engineering, brokerage, architecture and other services, entry tax on bringing construction material within a state etc. With GST subsuming these taxes, there is only one tax to be paid. Also, it is expected that removal of cascading effect of taxes (tax over tax), availability of additional input tax credits and decreased logistic cost on account of reconfiguration of supply chain under GST is expected to bring down the overall cost of construction.
Thirdly, tax optimisation driven structuring of entities, contracts may not be required under GST. Under the erstwhile tax regime with VAT applicable on goods and service tax on services, there was a tendency to split construction contracts into material and service portion to optimise the taxes. With advent of GST, the need to split contract into material and service portion, would not arise as the entire works contract (in relation to immovable property) would be treated as services liable at one rate of 18 per cent.
Lastly, the government also recognised the need to promote real-estate sector for weaker income group and accordingly, extended concessional rates of 12 percent for construction of houses under the Credit-Linked Subsidy Scheme (CLSS) to promote affordable housing, for economically weaker section, lower income group and specified middle income groups. The effective GST rate for such construction further comes down to eight per cent, after deducting one-third of the amount charged for the house/flat, towards land cost. This move surely lays down the foundation for emancipation of the rural sector in India, from a real-estate perspective.
Having said the above, GST reform is a process and not just a one-time event. It is still a work in progress and therefore, issues like ambiguity on treatment of Joint Development Agreements (JDA), taxability of Transfer of Development Rights (TDRs), restriction on availability of credit in case of works contracts resulting into immovable property (other than to contractor), allowing centralised registration etc. still need to be addressed under GST.
While the government has done its best by bringing GST at the right economic cycle (low inflationary period), the real estate sector will need some time, before it completely understands the implications of the tax on operations and compliance. It was always expected that there would be unexpected short-term disruptions. Nonetheless, in the long term, the benefits of efficient supply chains and lower tax and compliance costs is likely to trickle down to make the reform the ‘shot in the arm’ for real estate sector in India.