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
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.