GST was to be panacea to the multitude of inefficacies that plagued the real estate sector under the earlier indirect tax regime.
Goods and Services Tax, effective in India from July 2017, is an all-encompassing indirect tax regime that has brought a tectonic change in the landscape of Indian taxation, and many of us feel a sense of pride to have lived through this monumental event and transition.
GST was to be panacea to the multitude of inefficacies that plagued the real estate sector under the earlier indirect tax regime. Amongst others, restriction of credit pertaining to goods/services used in construction of office and commercial spaces has been one such inefficacy. Real Estate sector was hopeful that remnants of such credit restriction would not feature in the newly scripted GST. However, the same was not to be the case.
This key concern of the real estate sector remained unaddressed. No input credit is available in respect of GST paid on spends towards construction of office and commercial buildings by a developer which is intended to be leased out post construction, the rentals from which suffer output GST anyways.
Being a growing economy, the Indian business landscape has undergone a phenomenal transformation. It is no more about owning offices to save rentals and the shift is to leased office spaces with the ever increasing cost of real estate, flexibility in moving offices, upscaling and upgrading. An innovation in leasing is co-working spaces which are being hailed as the “offices of the future” with cost effectiveness and flexibility being the USP. These spaces offer state of the art facilities with amenities at effective prices which support the start-up scene in India. Moreover, even traditional businesses are looking at co-working spaces as a cost effective option with the ever growing lease rentals.
While taking office spaces on lease is a cost effective option for starting and running business, with restriction around input credit for commercial developers of such leased spaces, the GST cost in the hands of the developer is being passed on to the existing businesses and start-ups through increase in lease rental charges. This is because GST cost is adding at least 18% to the ever increasing cost of construction. This is in stark contrast with the underlying principle of seamless flow of credits of GST design.
The ask of the sector is for the Indian GST laws to give equal treatment to a developer who sells building under construction on payment of GST (in whose case the input GST credits on construction spends are allowed) and a developer who constructs and subsequently leases out the property (in whose case such input credits are not allowed).
In both the cases, GST is paid on the building itself; on upfront basis in the first scenario where the building is sold before completion and over a period of time in the case of rentals from buildings.
The GST law permits credit on works contract, outdoor catering, rent-a-cab services etc, which are otherwise restricted, where the same is used for making an outward taxable supply of the same category or as part of a composite supply. In line with this, an exception should be carved out so as to allow input tax credit of GST paid with respect to inputs and input services for developers engaged in the business of leasing / renting of property. There is a direct nexus to the inputs and input services used for construction of buildings and their subsequent leasing out which needs to be appreciated.
The Indian GST law can benefit by taking a cue from the VAT laws of other prominent countries such as that of UK and Ireland VAT laws, where tax paid on construction is allowed to be claimed by a developer for use against the output tax liabilities arising from rentals and other charges earned by letting out the buildings.
An amendment in the GST law to this effect is the need of the hour which will not only aid the businesses engaged in commercial development but also lessees who eventually bear the burden of additional tax cost.
This change would also be consistent with the basic tenets of GST which is lowering the cost of doing business. Businesses cannot wait for the GST council to include real estate, which should cover buying and selling of land and immovable property, under GST, for this credit restriction to be lifted. There is no fundamental reason for denying credits today for GST paid on construction of commercial spaces meant for leasing.
Source : https://realty.economictimes.indiatimes.com/realty-check/the-continued-burden-of-gst-for-commercial-real-estate-development/3354