GST for real estate: Boon or Bane?

The real estate sector is one of the fastest growing sector all over the world as well as in India. It is growing rapidly and we can access its growth by initiatives of government for modern cities such as ‘Smart Cities’.

However, the real estate sector has always been perplexed with multiplicity of taxes like VAT, service tax, stamp duty, etc. coupled with myriad disputes owing to ambiguity in the legal provisions.

With the proposed introduction of GST in 2017, hopefully these multiple taxes would be reduced to only two ie GST and stamp duty.

In the following paras, we have analysed the impact of GST on the real estate sector:

Sale of constructed (immovable) property:

GST is levied on supply of goods and services. The term ‘goods’ as defined under the Model GST law includes every kind of movable property. Hence, sale of property after construction (i.e., immovable property) should be outside the ambit of GST. However, stamp duty on the sale of immovable property would continue to be levied.

Further, on procurement of goods and services GST would be applicable. This GST would not be creditable and the developers would have to load this in the price of the property.

The situation largely remains the same as today where on the sale of immoveable property there is stamp duty; and on the procurement side there are non-creditable taxes (like VAT, service tax, excise duty, etc). The only difference would be that the current multiple taxes on procurement side would get replaced by GST and that there would be a rate difference in the current taxes and the rate of GST. The difference in rate, upwards or downwards, would accordingly impact the property prices.

Sale of under-construction property:

Per the GST Model law, construction of property is likely to be considered as works contract and works contract is treated as supply of service.

Hence, sale of under-construction property is likely to be covered within the ambit of GST. However, what is important is that appropriate abatement should be provided for the value of land; clarity on which is still awaited.

Since, on this category, GST is likely to be applicable on the output side, credit of GST paid on the goods and services on the procurement side should be provided. In this context, a clause in the Model GST Law states that credit of GST paid on goods and services acquired for construction of immoveable property (other than plant and machinery) would not be available. This clause is a cause of concern as it is ambiguous and interpretative which may lead to litigations and denial of credits for this sector. Further, if the credits are denied, the situation would be worse off from today wherein credit of input service tax and VAT is allowed against the output service tax and VAT.

Construction of property for leasing

The activity of leasing of immoveable property is likely to qualify as a service under the GST regime and would accordingly attract GST. In today’s regime, leasing of immoveable property for commercial purposes attracts service tax whereas leasing for residential purposes is in the negative list and does not attract service tax. The same regime should continue under GST.

For residential properties, since there is no service tax the input taxes become a cost; this situation is likely to continue in GST.

For commercial properties, though service tax is applicable on lease rentals, the input tax credits are not available under the current regime. In the proposed regime, GST is likely to apply on lease rentals; the issue for consideration is whether credit of GST paid on procurement of goods and services would be available or not. The answer is linked to whether immoveable property for commercial leasing would qualify as plant and machinery (in which case credit would be available) and if it does not (then credit would not be available).

Ambiguity on taxability of Transfer Development Rights (‘TDR’)

The landowners usually transfer the development rights in the land to the developer in lieu of certain flats which are provided by the developer to the landowner. To this end, ambiguity remains regarding taxability of such TDR as to whether the same are liable to service tax, and at what value.

The Model GST Law defines ‘supply’ in very wide terms, which also includes barter/ exchange of goods or services. Thus, most likely these transactions would attract GST. Hence, ambiguity on valuation of such barter/ exchange transactions would continue.

To conclude, we may say that GST for real estate sector is a montage of certain advantages and disadvantages depending upon the nature of transaction. Further, it is imperative to bring clarity regarding the eligibility of input tax credit for the developers/ contractors in the real estate sector and this requires immediate advocacy.