From multiple taxes to one GST on property under construction
From July 1, the goods and services tax (GST) will come into effect and it is expected to transform the way business is done in the country.
The tax will subsume all other taxes such as value added tax (VAT), central sales tax, excise duty, entry tax, and service tax that impacted the housing sector directly or indirectly, adding to the overall cost for the buyer.
In the housing sector, VAT and service tax were directly imposed. While VAT rates varied across states, service tax was 4.5%.
In addition to these taxes, the home buyer paid stamp duty on the registration of the property bought. The stamp duty rates vary from state to state.
For instance, in Punjab, the stamp duty was recently reduced from 9% to 6%. The stamp duty is out of the GST regime, and the buyer will continue to pay it.
The government has notified the GST on real estate under construction at 18% that will be applicable on two-thirds of the value of the property.
Last month, the government announced 12% on the total value of the property. After the notification and adjustment to land cost, the net tax will remain 12% of the selling price of a property.
Completed properties, which come under the immovable property category, are out of the purview of the GST regime
INPUT COSTS, TAX BURDEN
An important component of the GST is the introduction of input tax credit.
Under its provision, credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition.
“This makes GST, fundamentally, a tax only on value addition at each stage. This means that the end consumer will thus bear the GST charged by the last dealer in the supply chain, with set-off benefits at all earlier stages,” says Anuj Puri, chairman, ANAROCK Property Consultants.
Builders are expected to pass on the benefits of lower tax burden under the GST regime’s input tax credit to buyers of property by way of reduced prices or instalments.
“Any violation will be deemed to be profiteering under Section 171 of the GST law. The anti-profiteering authority (to be constituted under the GST tax regime) in case of nontransference of the benefit by the builder has the power to reduce prices. It can return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest at the rate of 18% from the date of collection of higher amount till the date of return of such amount. The recovery of the amount, including interest not returned in case the eligible person does not claim return of the amount or is not identifiable, and depositing the same in the fund referred to in section 57; imposition of penalty against the builder as prescribed under the Act; and cancellation of registration under the Act ” says Ajay Jagga an advocate based in Chandigarh.
ISSUE THAT MATTERS
“Builders acquire land on longterm lease for development and construction of building on that land and later offer to give the constructed units on a longterm lease for a consideration which is a lump sum amount of the premium.
However, under the exemption in GST, only premium charged for any lease of 30 years or more to any industrial unit or plot is exempted. National Real Estate Development Council (NAREDCO) has made a recommendation that a similar exemption needs to be extended in all cases (residential/housing plots and others) for any purpose.
NAREDCO has demanded clarity on taxability of preferential location cost (PLC) and parking charges,” says Parveen Jain, the president of NAREDCO
HOW INPUT CREDIT TAX WORKS OUT POSTGST WILL DETERMINE CHANGE IN OVERALL COST FOR BUYER