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De­cod­ing GST For Realty

As goods and Ser­vices tax (gst), one of the big­gest tax re­forms in the coun­try rolls out, the real-es­tate play­ers look for­ward to its im­pact clubbed with re­cently in­tro­duced Rera on the sec­tor.

Af­ter ini­tia­tives like “Hous­ing for all” and RERA, GST is all set to go a long way in en­sur­ing ef­fi­ciency in the realty sec­tor. GST will free home­buy­ers and in­vestors from the has­sle of pay­ing sev­eral state taxes at dif­fer­ent lev­els, there­fore re­mov­ing the double tax­a­tion im­pact. It will also help cut cash com­po­nent in con­struc­tion, as in­puts have to be ob­tained from reg­is­tered ven­dors to get in­put tax cred­its. GST is likely to boost for­eign in­vest­ment and ben­e­fit the NRI com­mu­nity for in­vest­ment in real es­tate be­cause of the sim­pli­fi­ca­tion of tax­a­tion. From the con­sumer point of view, the ma­jor ad­van­tage would be in terms of de­crease in the over­all tax bur­den on goods which is cur­rently es­ti­mated about 25%-30%. While the im­pact of GST on var­i­ous sec­tors and goods is now known, in­dus­try ex­perts are still di­vided over how GST will im­pact real-es­tate go­ing ahead as clar­ity on the tax slabs for ser­vices is still awaited.

Sukhraj Na­har, chair­man and Man­ag­ing Di­rec­tor of Na­har group elab­o­rated, “GST would help cut cash com­po­nent in con­struc­tion, as in­puts have to be ob­tained from reg­is­tered ven­dors to get in­put tax cred­its. The con­struc­tion of a com­plex build­ing, civic con­struc­tion is un­der 12 per­cent tax bracket with full in­put tax credit (ITC) sub­ject to no re­fund in case of over­flow of ITC and the bet­ter ef­fi­ciency in lo­gis­tics should also help re­duce prices of good. But, if we talk about nitty-gritty’s of the GST , in some cases, even in­put credit will be more than the GST levied on the fin­ished prod­uct, but a de­vel­oper can claim a max­i­mum credit to the ex­tent of the GST he would be pay­ing on the fin­ished prod­uct. As per the pro­vi­sions of GST, it can be ex­pected that GST may lead to in­put cost de­fla­tion for con­struc­tion in­dus­try as credit of taxes paid on var­i­ous in­puts used in the con­struc­tion ac­tiv­i­ties will be avail­able which is not avail­able in cur­rent tax regime.”

Bri­jesh verma, res­i­dent Part­ner and co-head, in­di­rect taxes (gst), Kochhar & co cited an ex­am­ple of the mixed re­sults of GST, “The ma­jor chal­lenge will be the avail­abil­ity of cred­its. For ex­am­ple, a builder con­structs 100 flats out of which 50 are booked. The de­vel­oper has al­ready pur­chased the con­struc­tion ma­te­rial on which he has paid VAT and it also imbeds an el­e­ment of cen­tral ex­cise for which he doesn’t has the cen­tral ex­cise in­voice. With the im­ple­men­ta­tion of GST, as the pro­ject is par­tially com­plete, he should ide­ally get the credit when he is be­ing charged at 12 per­cent on his out­put in­stead of 4.5 per­cent. Though it can be said that the bur­den of ad­di­tional 7.5 per­cent will be on the cus­tomer but this makes the pro­ject un­fa­vor­able among buy­ers.”

con­struc­tion costs

A vast ma­jor­ity of con­struc­tion ma­te­ri­als have been placed in the 28% tax slab (slightly higher than

cur­rent tax rates), hence the cost of in­ter­nal fit­tings such as ce­ramic ar­ti­cles, tiles, gran­ites, amongst oth­ers may go up marginally; an in­crease that might be trans­ferred onto buy­ers. An ex­cep­tion to this will be res­i­den­tial projects launched un­der the PMAY which have been ex­empted from the am­bit of the GST.

The Coun­cil has al­lowed for 100% In­put Tax Credit (ITC) on the raw ma­te­ri­als and ser­vices used for such con­struc­tion ac­tiv­ity. This will en­cour­age trans­parency, in­crease tax com­pli­ance and re­duce de­pen­dence on cash be­cause the ITC can only be availed if raw ma­te­ri­als are sourced from GST reg­is­tered ven­dors; even though the sec­tor might take its own time in ad­just­ing to the new guide­lines, given the ex­tent of un­or­ga­nized seg­ment in the in­dus­try. An­shu­man Mag­a­zine, chair­man, in­dia & South east asia - cbre in­dia is of the view that as a large ma­jor­ity of goods used in the real-es­tate and con­struc­tion seg­ment are sourced from ven­dors op­er­at­ing in the un­or­ga­nized space, iden­ti­fy­ing value ad­di­tions at each stage for eval­u­at­ing in­put tax credit is likely to be a chal­lenge. “While the gov­ern­ment has done its best by bring­ing in the reg­u­la­tion at the right eco­nomic cy­cle (low in­fla­tion­ary pe­riod), how­ever the in­dus­try will need some time, be­fore it com­pletely un­der­stands the implications of the tax rate on op­er­a­tions and com­pli­ance.”

un­der-con­struc­tion & com­pleted Prop­er­ties

Un­der GST, an un­der-con­struc­tion prop­erty is cov­ered un­der works con­tract and clas­si­fied as a ser­vice. The GST Coun­cil has de­cided to tax con­struc­tion of a com­plex or build­ing for sale to a buyer, wholly or partly, at 18%, which may lead to an in­crease in the cost of un­der­con­struc­tions prop­er­ties. How­ever, partly ad­dress­ing the need of the in­dus­try to ex­clude land from the value of com­put­ing GST; the 18% tax would be charge­able on only two-thirds of the un­der-con­struc­tion prop­erty value, which brings the ef­fec­tive GST rate on un­der­con­struc­tion prop­er­ties to 12%.

Since com­pleted and ready to move in prop­er­ties can­not be clas­si­fied as a ser­vice, both have been kept out of the purview of GST. Stamp duty and regis­tra­tion charges have also been kept out of the am­bit of GST.

Res­i­den­tial & com­mer­cial seg­ment

Im­pact of GST may vary ac­cord­ing to the type of pro­ject and con­struc­tion meth­ods as only un­der con­struc­tion flats are tax­able un­der GST and in­put cred­its on sales of un­der con­struc­tion flats are avail­able to set off. Ren­tal in­come from res­i­den­tial prop­er­ties used for res­i­den­tial pur­poses would con­tinue to be ex­empted un­der the GST regime and such prop­er­ties were also ex­empted from ser­vice tax pre­vi­ously. Leas­ing of com­mer­cial, re­tail and ware­hous­ing prop­er­ties has been put in the 18% tax slab, as com­pared to the cur­rent ser­vice tax of 15%. This is likely to in­crease the oc­cu­pancy costs for oc­cu­piers in these seg­ments. “De­vel­oper or Pro­moter has to col­lect taxes from cus­tomers from time to time and he is el­i­gi­ble to take in­put tax credit on goods as well as ser­vices used for con­struc­tion ac­tiv­i­ties. GST will help cut cash com­po­nent in con­struc­tion as prod­ucts have to be sourced from reg­is­tered ven­dors to get in­put tax cred­its,” added Sukhraj Na­har.

af­ford­able seg­ment:

Cur­rently un­der VAT sys­tem in Ma­ha­rash­tra, tax ex­emp­tion is not avail­able to af­ford­able hous­ing scheme. It is ex­pected that there will be no tax un­der GST on hous­ing projects as well as on in­puts and in­put ser­vices used for projects which comes un­der af­ford­able hous­ing scheme. This will en­sure cost in­fla­tion im­pact is not passed by pro­mot­ers / de­vel­op­ers to cus­tomers who pur­chase res­i­den­tial units un­der the af­ford­able hous­ing scheme. Bri­jesh verma stated, “There are con­ces­sions and ex­emp­tions for the scheme of af­ford­able hous­ing in terms of ser­vice tax but there is no such ex­emp­tion un­der the GST law. Gov­ern­ment might take the route of re­fund to the cus­tomer i.e. the taxes and cred­its levied will be re­funded to the cus­tomers. In case of ben­e­fi­ciary led in­di­vid­ual house con­struc­tion en­hance­ment un­der the Hous­ing for All or Prad­han Mantri Awas Yo­jna, the pure labour con­tracts are ex­empted, but the ma­te­rial used will still be tax­able. There­fore, the Gov­ern­ment nodal agency, de­vel­op­ment au­thor­ity or a hous­ing board might pur­chase the ma­te­rial on their names and en­gage the con­trac­tors.”

SUKHRAJ NA­HAR

bri­jesh verma

AN­SHU­MAN MAG­A­ZINE

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