One such sector is real estate which has seen a drastic slowdown, sluggish demand, and has been grappling with many regulatory changes in the recent past.
It’s been 11 months since the government implemented the Goods and Services Tax (GST) with an objective of ‘One Nation, One Market, One Tax’ principle, but it is still to stabilise and is undergoing frequent revisions. While some sectors have gained due to GST roll-out on account of reduction in tax rates and availability of tax credits, other sectors have seen negative growth due to products and services becoming costlier.
One such sector is real estate which has seen a drastic slowdown, sluggish demand, and has been grappling with many regulatory changes in the recent past, which interalia includes the Real Estate (Regulation and Development) Act, 2016 (RERA) and GST. Ambiguity in provisions as well as multiple taxation have led to huge litigations, especially relating to taxability and correct valuation.
The applicable GST rate on construction activity is 18%, however due to inclusion of land cost in the contract value, a deemed deduction of 1/3 of the total contract value has been provided, leading to an effective GST rate of 12%. Although such a high rate could have an adverse impact on this sector, the same could largely get reduced due to ease in credits availability.
The government assumes that land contributes to 33% of the total contract value. Though this assumption may hold true in some locations like Tier 2 and Tier 3 cities, the value of land and its proportionate cost in overall construction value differs sharply. The component of land cost in overall construction cost in Mumbai would be way higher (higher than 33%) compared to some non-metro cities. Hence, this has led to a great disparity in the project prices, impacting profitability and leading to an increase in the project cost. Therefore, it would be pertinent that the slabs of land deduction under GST are dynamic and take into consideration the difference in land cost across different geographic regions.
Disallowance of GST credit to companies not in the business of construction or rendering works contract services continues under GST regime also. Hence, companies who are into manufacturing and getting new factories constructed or companies constructing warehouses for providing storage services or constructing commercial property for subsequent leasing (such as malls, office complexes, etc.) would not be eligible to avail the GST credit paid by them to the developer/contractor, thereby adding the same to the cost.
Real estate developers are already under the radar of the National Anti-profiteering Authority for allegedly denying consumers the benefit of reduced tax burden under GST. Since, builders are now eligible to full credit of taxes paid on its procurement, CBEC has made it clear that the project cost should not include any indirect tax cost.
Under the erstwhile regime, central government charged 4.5% service tax (15% service tax on 30% of the value of under-construction flats) and state government used to charge 5% value-added tax levied on such contracts, taking the total tax burden to 9.5% without input tax credit. Under the current GST regime, though the rate is 12%, substantial amount of input credit is available to the developers to offset against the said liability, thereby reducing the effective tax burden. Therefore, it is imperative for the builders to establish passing of the GST benefit to consumers.
Though the developers are ready to pass on the benefit that they have earned due to GST, till date no specific procedure or methodology has been prescribed by the National Anti-profiteering Authority for working out the exact benefit that needs to be passed on to the consumers. This has led to unnecessary confusion in the industry and emergence of different working models/calculations.
There are also many open questions relating to calculation that need clarity – whether the benefit that needs to be passed should be worked out on value basis or area basis? – In case of redevelopment done by SRA who is the customer: government or the house owners/slum dwellers? – Should the cost incurred for flats which are sold after getting the occupancy certificate also be considered for working out the benefit?
Though GST has been rolled out with an objective to have ‘One Tax’ across the nation, thereby eliminating multiple taxes, it has not been implemented in full spirit as stamp duty is still charged in addition to GST levied on construction services. Stamp duty, being a state levy, varies from state to state and if clubbed with GST the tax burden can increase upto 20% in some states. Builders are of the view that subsuming stamp duty with GST will boost the sales, and will provide the much needed elixir for the sector, which is already bleeding with high inventory piled up and cash crunch.
Although GST in real estate is a welcome move that removes multiple taxes and provides seamless credits, working out the benefits in light of anti-profiteering is still a big puzzle for many. We hope that the trade association and the government work in harmony to bring more clarity for the sector that in turn can substantially contribute to the ‘Housing for All by 2022’ mission.
(Supported by Kishore Purohit, a tax professional)
Author: Santosh Dalvi Partner and Deputy Head of Indirect Tax, KPMG, India