The Roller-coaster Ride of GST

Much has been said and writ­ten about GST in the last one year of its in­cep­tion. The GST leg­is­la­tion was not de­signed with the real es­tate in­dus­try in mind, but the sec­tor was ex­pected to ben­e­fit from it. Has GST been the ‘game changer’? Na­dine D’souza exp

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On July 01 2017, In­dia implemented its Goods and Ser­vices Tax (GST), the big­gest tax re­form since in­de­pen­dence. GST brought mul­ti­ple lo­cal taxes like value added tax, cen­tral ex­cise duty, com­mer­cial tax, ser­vice tax and oc­troi etc., un­der its gamut with the aim of achiev­ing the vi­sion of ‘One Na­tion One Tax’. The an­nounce­ment of the leg­is­la­tion trig­gered ex­pec­ta­tions of a re­duc­tion in the prices of goods and ser­vices and a bar­rier-free move­ment of goods across states. Fur­ther­more, to keep in­fla­tion to a min­i­mum and bring all states on board, the gov­ern­ment cre­ated a dual GST regime, where there is mul­ti­ple tax rate sys­tem with items of com­mon con­sump­tion taxed at a much lower rate. Pe­tro­leum prod­ucts, power and real es­tate have been ex­cluded from the GST.

in­dia has the high­est GST rate in Asia, and sec­ond high­est in the world af­ter Chile. As per the World bank, in­dia’s GST is among the most com­plex in the world with one of the largest numbers of tax slabs.

It’s been a year since GST was implemented, and al­ready it has un­der­gone var­i­ous al­ter­ations such as re­duc­tion of tax rates of mul­ti­ple items and in­creases in the cesses and levy rate, iron­i­cally both of which were sup­posed to be elim­i­nated un­der the new law.

the Com­plex­ity arises due to dif­fer­ent gst Rates ap­pli­ca­ble to dif­fer­ent goods and ser­vices. In­dia cur­rently has four non-zero rates: 5, 12, 18 and 28 per cent. GST’S am­bi­gu­ity has only led to is­sues re­gard­ing tax­a­bil­ity and cor­rect val­u­a­tion. Ac­cord­ing to the GST coun­cil, the real es­tate sec­tor un­der GST is a “deemed ser­vice”. There­fore, GST ap­plies only to un­der con­struc­tion prop­er­ties, which will be charged at 12 per cent (this does not in­clude stamp duty and regis­tra­tion charges) and does not ap­ply to com­pleted or ready to move in projects. In the months fol­low­ing the im­ple­men­ta­tion of GST, the real es­tate mar­ket saw a dip in home sales be­cause of the con­fu­sion over GST. Buy­ers de­cided to wait for prop­erty prices to fall be­fore mak­ing a pur­chase de­ci­sion. A year later, there has been a lit­tle more clar­ity on tax reg­u­la­tions. Much of the con­fu­sion has cleared but be­cause of the higher tax on un­der con­struc­tion projects, the home­buy­ers de­mand has been sub­dued. De­vel­op­ers too are proac­tively pro­mot­ing and sell­ing their com­pleted projects. This would be good for the sec­tor.

the Mixed Re­ac­tion Manju Yag­nik, Vice Chair­per­son, Na­har Group be­lieves that the im­ple­men­ta­tion of GST has helped in mit­i­gat­ing the surg­ing ef­fect of taxes with con­struc­tion ser­vices specif­i­cally be­ing cat­e­go­rized as ‘sup­ply of ser­vice’. “The ef­fec­tive tax rate for con­struc­tion ser­vices is pegged at 12 per­cent of the en­tire agree­ment value, with an abate­ment of one-third be­ing pro­vided to­wards land value. Due to the GST regime, the gross tax out­flow on in­vest­ing in a prop­erty has seen a steep rise of up to 8 per cent which is very high in terms of cash out­flow,” she said. Some de­vel­op­ers be­lieve that GST has brought sig­nif­i­cantly more clar­ity and com­fort for buy­ers. Farshid Cooper, Manag­ing Di­rec­tor, Spenta Cor­po­ra­tion is of the view that GST has helped or­ga­nize sev­eral un­or­ga­nized play­ers. “In the time to come, I sense that pro­cesses and trans­ac­tions will be fur­ther stream­lined. Fur­ther, re­vi­sion of rates from 28% to 18% for sev­eral con­struc­tion ma­te­ri­als has helped ven­dors man­age their cash flows more ef­fi­ciently. We are pleased that the gov­ern­ment is con­sciously bring­ing about change in the sec­tor that is ben­e­fit­ing the de­vel­oper as well as the buyer.” In spite of its sev­eral grey ar­eas, GST could serve as a dis­rup­tive re­form ac­cord­ing to Amit Wad­hwani, Di­rec­tor, Sai Es­tate Con­sul­tants “GST cou­pled with the RERA act has man­aged to of­fer buy­ers a sim­pli­fied tax struc­ture and bring in trans­parency in the sec­tor. How­ever, GST has not been help­ful in bring­ing down the prices of res­i­den­tial real es­tate over the past year. Though the in­tent of the Gov­ern­ment is to make it tax neu­tral, as far as real es­tate is con­cerned, this has not hap­pened. Ear­lier when ser­vice tax was levied, there was 70 per­cent abate­ment for land cost, whereas in GST, land abate­ment is only one third of land value. This is a huge bur­den on flat buy­ers.” Ash­wani Awasthi, Chief Op­er­at­ing Of­fi­cer, RICS South Asia says, “The idea of GST stands out on ac­count of its us­age of ‘tax cred­its’. GST has in­tro­duced the con­cept of in­put tax credit, which means that cred­its of in­put taxes paid at every stage of con­struc­tion can be availed in the stage of value ad­di­tion. The in­dus­try can now claim credit on in­put costs such as steel, ce­ment and sand used for con­struc­tion.” But oth­ers like Anuj Puri, Chair­man - ANAROCK Prop­erty Con­sul­tants are not con­vinced. He stated, “GST was, in many ways, the fi­nal bul­let shot to the In­dian real es­tate sec­tor in July 2017. The in­dus­try was al­ready reel­ing un­der the im­me­di­ate im­pact of de­mon­e­ti­za­tion and RERA. It was largely an­tic­i­pated that GST will pro­vide a much-needed respite to home­buy­ers by way of re­duced prop­erty prices. Un­for­tu­nately, with GST com­plet­ing one year, it emerges that th­ese ex­pec­ta­tions were un­re­al­is­tic. While the tax-on-tax has been elim­i­nated, the over­all outgo from home­buy­ers’ pock­ets seems to have in­creased by as much as 8% across cities. This ul­ti­mately re­duces the de­mand in real es­tate mar­ket.”

End users have not re­ceived any cor­re­spond­ing ben­e­fit of GST be­cause of the in­her­ent in­ef­fec­tive­ness of the anti-prof­i­teer­ing pro­vi­sions. They will only ben­e­fit if the base prop­erty prices are re­duced and de­vel­op­ers pass on the tax cred­its to their cus­tomers.

work­ing out the Kinks

Ac­cord­ing to the in­dus­try ex­perts, 18 per cent GST on long term leased lands at­tract­ing GST, is an anom­aly that needs to be cor­rected. There should also be a pro­vi­sion for In­put credit on con­struc­tion of com­mer­cial build­ings against lease ren­tals. This will help REITS be­come a suc­cess in In­dia. Apart from GST, the Stamp Duty on real es­tate trans­ac­tions, es­pe­cially on con­veyance, con­tin­ues to be levied by re­spec­tive state gov­ern­ments and other du­ties and sur­charges too re­main on the higher side. States are reluc­tant to elim­i­nate th­ese taxes cit­ing the po­ten­tial dip in the rev­enue in­come. On the other hand, realty sec­tor de­mand is to scrap the stamp duty or bring it within the GST rates. Shishir Bai­jal, Chair­man & Manag­ing Di­rec­tor, Knight Frank In­dia be­lieves that fig­ur­ing out how home­buy­ers can ben­e­fit from the anti-prof­i­teer­ing clause is still vague. Clar­ity is the need of the hour, and this can only hap­pen if the gov­ern­ment and trade as­so­ci­a­tion work to­gether to re­solve the is­sues.

so, what Can home­buy­ers EX­PECT?

There is an ex­pec­ta­tion that the elim­i­na­tion of tax-on-tax, and the avail­abil­ity of in­put tax credit will re­duce the fi­nal cost of con­struc­tion and the de­vel­op­ers would pass on the ben­e­fit of a lower cost of con­struc­tion to home­buy­ers. “The anti-prof­i­teer­ing clause in the GST bill, un­der sec­tion 171, says that any re­duc­tion in the tax rate on sup­ply of goods or ser­vices, or the ben­e­fit of in­put tax credit should be passed on to the re­cip­i­ents (in this case-home buy­ers) by a com­men­su­rate re­duc­tion in prices. In fact, the Cen­tral gov­ern­ment has con­sti­tuted the Na­tional An­tiprof­i­teer­ing Author­ity (NAPA) to ex­am­ine whether in­put tax cred­its have re­sulted in an equal re­duc­tion in prices of goods or ser­vices,” ex­plained Awasthi. Af­ter a year, it is yet to be as­cer­tained what per­cent­age of in­put tax cred­its should be passed on to home­buy­ers or the mode of trans­fer of such cred­its. Mean­while, the lack of trans­parency on this front has dis­ap­pointed home­buy­ers, who were ex­pect­ing a re­duc­tion in their fi­nal pay­ment. What re­mains to be seen is if all de­vel­op­ers will com­ply by this man­date and how.

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