Goods and Service Tax (GST) and Real Estate Sector

As we all know that the whole nation has been dreaming for the biggest indirect tax reform i.e. implementation of the Goods and Service Tax (GST) for a decade, it is going to become a reality soon. Ever since the thunder of GST has hit the nation, there are various assumptions, presumptions, and expectations etc. among the different stakeholders such as government, consumers, companies etc. as to how this biggest indirect tax regime is going to affect them.

Named as One Nation One tax (though not, due to different rate structure), since the GST is going to have a huge impact in various sectors such as manufacturing, trading, banking and finance, telecommunication, real estate etc., every sector is busy in migrating to the GST, preparing the road map for GST implementation, formulating the plans to encounter any negative impacts and coming up with new designing and projections to boost their survival, growth and profitability under the new tax regime.

Among the various such sectors, one of the most important sectors is Real Estate. Since the Real Estate sector alone contributes around 5% to 6% to the country’s GDP, it is very important for the sector to analyse, discuss and prepare for possible impacts on Costs, Taxes and Profitability under GST.

Under the current indirect tax regime, the Real Estate sector has always been very litigious matter. The Real Estate sector is exposed to multiple indirect taxes such as custom duty, excise duty, VAT, Service tax and also subject to Stamp Duty. Generally, whatever indirect taxes the real estate business bears, it collects those taxes from its prospective customers. But there has always been disputes regarding computation and determinations of such tax liability. Although the current tax regime has provided certain rules and methods in computation and determination of such taxes, the same has not been followed uniformly. Consequently, many tribunals, high courts and the Supreme Court have given different judgments with regard to such issues.

Moreover, the Real Estate Builder/Developer is not eligible to take credit of custom duty, excise duty which will add to the cost of constructions ultimately increasing the prices of apartments, flats etc. Also there is no provision to take credit of VAT against Service tax and vice versa. Due to the multiple taxes, the Builder/Developer has to maintain various books and records under different taxes, file multiple returns/forms and many times has to encounter with various tax authorities, which will ultimately increase the compliance cost and time.

To reduce such harassment that is there due to multiple taxes, GST is expected to be the game changer which will subsume or replace various existing indirect taxes. The implementation of GST is likely to improve transparency and reduce tax evasion on account of better enforcement and compliance and possibly reduce cost of home ownership. It has also promised seamless flow of tax credit which will help the Builders/Developers to reduce cascading effect and restructure their cost estimation and pricing with less compliance cost and time.

The Government is leaving no stone unturned to rollout GST from July 1st, 2017. Now the Lok Sabha has also cleared four supplementary GST Bills i.e. CGST, IGST, UTGST and Compensation Cess Bill with some amendments. This has marked a historic step for GST to become a reality.

As per Bills passed by the Lok Sabha, Sale and purchase of Immovable properties (Land and Buildings) have been kept outside the purview of GST since these transactions attract Stamp Duty (Stamp Duty is not subsumed to GST) but under-construction properties are covered under GST. This will ensure the transparency and uniformity in the real estate transactions and save or reduce compliance cost and time.

Even though the Four Supplementary GST bills have been passed, there is still a long way to go to see the correct picture of GST and its impact on the Real Estate Sector. After passing of these four Bills, still State Assemblies have to pass the respective State GST i.e. SGST Bills. Also the Government has yet to decide classification of goods and services under different rate structure; Valuation methods and rules; abatements and exemptions (currently available under service tax); reverse charge implications; implication of stamp duty on under-construction properties etc. etc.

Because of these reasons, the exact magnitude of impact of GST on the sector cannot be determined as of now but would have to depend upon the actual implementation of the GST.

But yes, the GST, a long awaited tax reform which is expected to improve India’s GDP by at least 2% to 3% aims to consolidate various state and central taxes into a single tax thus making it one of the biggest tax reforms and making the country one unified market.

Let’s hope and see what GST will bring in coming days.

Disclaimer: This write up is based on the understanding and interpretation of author and for knowledge purpose only and the same is not intended to be a professional advice. All valuable comments and feedback are welcome