Not all states on board with GST rate cut for real estate

FINANCE MINISTERS OF SEVERAL STATES SAY

THE PROPOSED RATE CUTS WITHOUT INPUT TAX CREDIT COULD MAKE PROPERTIES COSTLIER

NEWDELHI: A meeting of the Goods and Services Tax Council (GSTC) scheduled on Sunday to lower taxes on the real estate sector could turn out to be stormy. Several states say the proposed changes are cosmetic and could effectively raise property prices, two officials with direct knowledge of the matter said.

Finance ministers of several states, particularly those ruled by opposition parties, have said the proposed rate cuts without input tax credit could make properties costlier than prevailing prices, the two officials said, requesting anonymity.

GSTC, chaired by Union finance minister Arun Jaitley, formed a group of ministers (GOM) in mid-january to rationalize tax rates for the real estate sector. The GOM, headed by Gujarat deputy chief minister Nitin Patel, which submitted its report to the GSTC recently, recommended cutting tax rates for under-construction residential properties to 5% from 12% without credit for taxes paid on raw materials such as cement, steel and paint. Goods and services tax (GST) on affordable housing was proposed to be lowered to to 3% from the existing rate of 8%, without input tax credit.

Although tax on the real estate sector is 18%, due to abatement for land value (about 33%), the effective GST rate comes to 12%. As GST regime allows input tax credit on building materials, a person can save an additional 5% tax by claiming tax paid on cement, steel and other raw materials. Prices will, therefore, go up if the input tax credit is withdrawn.

Some opposition-ruled states have demanded that the tax rate on affordable housing be cut to 1%, medium-priced houses to 5% and the premium segment to 7%, one of the officials cited above said. These states include Kerala, West Bengal, Punjab and Delhi, the official said.

The finance minister of a Congress-ruled state said, “There are several important technical issues left for the fitment committee to decide..., which is not acceptable. Such matters should be discussed at the council and decided by the members [finance ministers], not technocrats.” The fitment committee of the GSTC is made up of bureaucrats

The second official quoted above said West Bengal had written a letter to the GSTC on Thursday demanding a threeslab tax structure for the real estate sector of 1%, 5% and 7%.

“West Bengal has also asked to drop the differentiations between metro and non-metro to avoid definitional complications saying that any artificial segregation of housing, contiguous to the metro cities, could lead to serious interpretational issues and open up the possibilities of rent seeking,” the official said.

Both West Bengal and Punjab have asked the Council to exempt long-term leases from GST to avoid double taxation, the official said.

The 33rd meeting of the GST Council on Wednesday was postponed because some states demanded that such important matters could not be deliberated through a video conference and it was agreed by the chairman that a face-to-face meeting will take place on Sunday.

Pratik Jain, partner and leader of the indirect tax practice at the consulting firm PWC India, said: “While the reason for the postponement [on Wednesday] could be lack of consensus, it perhaps gives the Council a little more time to deliberate on the recommendations of Group of Ministers to address the real estate sector issues”.