GST will trump extant complex taxation systems for real estate sector. The article explains the pains experienced today and various issues that may be resolved in near term
|Malini MallikarjunSource: Money Control
Real estate sector has witnessed significant tax changes over past few decades; changes which have led to diversified regulations and practices being followed in different States and by various parties. The turning point in taxation for the real estate sector (which, to a great extent, opened Pandora’s Box) was 46th Amendment to the Constitution wherein specific powers were bestowed upon the States to levy sales tax (‘VAT’) on certain transactions, which allowed states to levy VAT on works contract. The next significant change was introduction/ levy of service tax on works contract with effect from June 01, 2007.
One of the most complex aspects of the taxes levied by the Centre and the States is the treatment of works contract, land and real property. Under the extant regime, such transactions can broadly be categorized in three parts – the value of goods and materials, value of services and value of land. The states apply VAT to the goods portion and the centre taxes the services portion, with no explicit tax on the transaction value of land (other than stamp duty). Though such split may sound reasonable or logical, the same is fictional in nature and hence more often (than not) leads to dual-taxation and more importantly, difficulty in implementation and compliances. If the aforesaid multitude of taxes was not enough, the complexities built around the tax rates and valuation rules made the entire real estate sector jittery since the same led to multiple taxes on same transaction, and hence leading to cascading effect. Such dual taxation has been put to judicial scrutiny (time and again); however the dust around such disputes seems to have settled with recent Supreme Court rulings affirming Centre’s and State’s power to levy service tax and VAT, respectively. Though the legislation and its interpretation is getting more clarity; as it happens with most indirect taxes, the ultimate bearer of such inefficiencies in the tax regime was the end customer.
In the aforesaid, brief background, the next issue which would come to anyone’s mind is: will the proposed GST provide any relief to the real estate sector in as far as the multiplicity and inefficiencies in the current tax system is concerned?
Probable GST impact on real estate sector
The Constitution (122nd) Amendment Bill proposes to have a common GST for supply of goods or services. The proposed model appears to provide for a separate tax rate schedule for goods and services both at Central and state level, that is, CGST and SGST respectively. At this stage, there does not appear to be any concern in cases where there is a supply of either goods or services alone; the issue (and may be a complex one) could be around GST treatment for composite supplies (i.e. where goods and services, both, are involved). The situation may get further complicated with States having powers to notify differential SGST rate, i.e. each State having their own SGST rates for goods/ services consumed in their own respective state.
Currently, a developer/ builder incurs various types of costs during the construction phase; such costs have different indirect tax components, i.e. customs duties, VAT/ CST, excise duty, service tax, etc. Most of the aforesaid taxes are costs in the system as many of them (i.e. customs duties, CST, service tax etc) are not creditable either to the developer/ builder or to the end-customer. Such non-creditable costs are one of the major causes which bring tax inefficiency.
One of the possible, positive outcome of proposed GST is that the proposed GST might do away with the restrictions on credit utilization (other than basic customs duties and additional tax @1%) and hence strengthening the credit chain in the system. If this so happens, there will be increased credits available in the procurement chain and hence better utilization of tax costs towards output GST liability. If properly managed, developers/ builders can look towards some increase in their margins, subject to the proposed additional tax of 1%
Though the taxation structure should be streamlined and progressive, the compliances associated with the proposed GST should have no or minimum impact on developers/ builders. This is for the reason that even currently, developers/ builders having their projects in more than one state have to comply with State specific VAT laws, along with respective compliances, and also with the service tax (either single premise or centralized). Thus we do not foresee any additional compliance requirements which could increase burden on developers/ builders.
Key issues to look out for:
In the coming few weeks/ months, the real estate sector should definitely work towards seeking clarity on some of the following aspects in the GST regime:
(i) Deemed sale of goods: Though the Constitution (122nd) Amendment Bill provides for overhauling changes for the manner in which GST can be levied; however the said Amendment Bill has not made any changes to Article 366 (29A) which provides for the concept of deemed sale of goods. This being the case, will there be separate treatment for transactions involving deemed sale of goods is continuing concern which needs to be addressed!
(ii) Running contract: Most importantly, there will be many contracts which will spill over to the new GST regime. For such contracts, it will be expected that the Government will come out with appropriate mechanism for determining place of supply post GST implementation and also mechanism for smooth transition for such on-going, long-term contracts.
(iii) Definition of a developer/ builder: Many states have different composition schemes for developer/ builders (the VAT rate ranging from 1% – 5%). Though few states have separate definition of developer and contractor (eg Haryana), there are states which do not have such differentiation. In such a situation it needs to be seen if the proposed GST will have specific definition of developer and contractor; also it needs to be seen if the GST legislation will have separate regime for works contract.
(iv) Residential property: Currently, service tax is not leviable on renting of immovable property for residential purposes; however VAT and service tax are leviable on construction. The issue is whether proposed GST will provide differential tax treatment for residential properties.
As they say, “a known devil is better than an unknown angel”; however the proposed GST might be the unknown angel which trump the existing indirect tax regime. With the Indian economy riding on the hopes of better and streamlined indirect tax regime, we hope that the real estate sector should also benefit.
Author is Partner with BMR & Associates LLP
Bhupender Singh contributed to the article.