POSITIVE MOVE - GST: Win-win for buyers, developers
Jul 01 2017 : The Times of India (Pune)
RAKESH MALIK
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The Goods and Services Tax (GST) roll out in July provides a unique opportunity for both buyers and developers
With Goods and Services Tax (GST), one of the biggest tax reforms of independ ent India, all set to be a reality soon, the real estate sector is expected to get a boost. The good news for both the developers and home buyers is that they will all stand to gain from this historic financial move.Industry experts feel that the move will help the sector in a big way. Jaxay Shah, president, CREDAI, talking about GST and its possible impact on the real estate sector, stresses, “CREDAI welcomes the introduction of GST as a major reform since it integrates all central and state taxes into one comprehensive tax regime for the entire country. Trade and industry are major gainers of GST as it will eliminate multiple taxation at the level of states and the Centre, with the consequent cascading effects. However, whereas for all other sectors, GST is their total indirect tax liability, for the real estate sector, the GST rate, fixed at 12 per cent, is only a frac tion of its tax burden. The real estate sector is exceptional because GST regime does not eliminate multiple taxation.
Stamp duty, levied by the states on all immovable property would continue to remain in force even after implementation of GST.
The additional burden on real estate on account of stamp duty averages between 5 to 8 per cent of the value of the immovable property. Besides, the stamp duty is payable on every transaction. Lastly, stamp duty is levied by the state governments on circle rates or guideline values of property which are arbitrarily determined and far in access of the value at which transactions take place.“ Shah further explains, “Unless abatement for land is allowed, cost to the end-consumer would go up. CREDAI would, therefore, urge the government to minimise double taxation on real estate by treating land as zero rated under the GST regime. The positive multiplier effect of real estate on other industries would make up the revenue loss and the nation would be thankful for a tax regime consistent with the objective of Housing for All by 2022.“
Explaining the new reform further, Sachin Menon, partner and head, Indirect Tax, KPMG, India, elaborates, “The government has specified the GST rate of 12 per cent on sale of under-construction property (including the value of land). Sale of land completed property is not subject to GST. The primary inputs such as cement is taxable at 28 per cent, whereas steel will attract a GST of 18 per cent. Although developers can claim full ITC (Input Tax Credit), refund of any excess unutilised ITC is not permissible. Thus, GST is expected to have a mixed impact on the real estate sector. While there is a positive impact due to higher input tax credit, however, the inclusion of value of land for payment of GST at full rate of 12 per cent is not in line with the industry expectation.“
Sharing industry inputs on the same, NAREDCO Chairman, Rajeev Talwar, points out that GST is the biggest reform in the finance sector since 1947 and NAREDCO compliments the Union Government and state governments for painstakingly working out this path-breaking reform, “NAREDCO had submitted a white paper to government with detailed analysis of tax rates at multiple points and their implications. We are happy that the Paper has been studied and considered by the GST Council. The heavily taxed real estate sector welcomes a single, stable 12 per cent GST rate, inclusive of the value of land and with full Input Tax Credits. NAREDCO is of the view that the actual tax incidence under GST would match or be lower than the existing multiple indirect taxes on the sector. The GST rate for work contracts, which will also be offset by input credits, is expected to provide a seamless and simplified tax policy. The 12 per cent GST for construction of projects for sale to buyers will be a much required shot-in-the-arm to speed up the growth of this sector.“
Considered to be a game-changer for the sector, NAREDCO President Parveen Jain, agrees, “There is no doubt that GST will be a game-changer for Indian industry, including the real estate sector, since it will subsume more than 16 major taxes and levies into a single consolidated tax. Additionally, the unified tax regime will stop the unwanted practice of double taxation, which hurt real estate and other sectors, given their cascading effect en their cascading effect with inflated prices for end users. NAREDCO is further hoping that the GST Council will also address issues related with affordable housing segment, which was exempted from service tax in the previous tax regime.“
Clearing the air about GST's effect on home buyers, Menon, avers, “As far as buyers are concerned, continuation of stamp duty on agreement value with enhanced GST rate will increase the cost of buying real estate unless the developers pass on the benefit of GST to consumers. Given that property prices are market-driven, and seldom based on cost of construction, the expectation of any reduction for consumer who has already purchased the property seems to be far-fetched. The government is expected to generate higher revenues from increase in the tax on the sector especially due to restriction on refund of excess input tax credit. Indian real estate is driven by consumer demand and sentiments, unless the prices are brought at the realistic level, an uptick in demand curve may take some more time.“
On a concluding note, Menon explains the trend sighting an example of tax break-up for consumers, “At present, a buyer, say in Mumbai, has to pay Maharashtra VAT at the rate of 1 per cent on the agreement value. Besides VAT, the buyer also pays service tax on entire consideration at the abated rate of 4.5 per cent. Thus, the effective incidence for the buyer is 5.5 per cent (approx.) on the sale price. Going forward, under GST, though he will not pay VAT Service tax, nevertheless, he will be liable to pay GST at the rate of 12 per cent. So, clearly the tax burden for buyer will increase by around 9 per cent unless the same is compensated by way of reduced prices by the developer due to enhanced ITC.“
Stamp duty, levied by the states on all immovable property would continue to remain in force even after implementation of GST.
The additional burden on real estate on account of stamp duty averages between 5 to 8 per cent of the value of the immovable property. Besides, the stamp duty is payable on every transaction. Lastly, stamp duty is levied by the state governments on circle rates or guideline values of property which are arbitrarily determined and far in access of the value at which transactions take place.“ Shah further explains, “Unless abatement for land is allowed, cost to the end-consumer would go up. CREDAI would, therefore, urge the government to minimise double taxation on real estate by treating land as zero rated under the GST regime. The positive multiplier effect of real estate on other industries would make up the revenue loss and the nation would be thankful for a tax regime consistent with the objective of Housing for All by 2022.“
Explaining the new reform further, Sachin Menon, partner and head, Indirect Tax, KPMG, India, elaborates, “The government has specified the GST rate of 12 per cent on sale of under-construction property (including the value of land). Sale of land completed property is not subject to GST. The primary inputs such as cement is taxable at 28 per cent, whereas steel will attract a GST of 18 per cent. Although developers can claim full ITC (Input Tax Credit), refund of any excess unutilised ITC is not permissible. Thus, GST is expected to have a mixed impact on the real estate sector. While there is a positive impact due to higher input tax credit, however, the inclusion of value of land for payment of GST at full rate of 12 per cent is not in line with the industry expectation.“
Sharing industry inputs on the same, NAREDCO Chairman, Rajeev Talwar, points out that GST is the biggest reform in the finance sector since 1947 and NAREDCO compliments the Union Government and state governments for painstakingly working out this path-breaking reform, “NAREDCO had submitted a white paper to government with detailed analysis of tax rates at multiple points and their implications. We are happy that the Paper has been studied and considered by the GST Council. The heavily taxed real estate sector welcomes a single, stable 12 per cent GST rate, inclusive of the value of land and with full Input Tax Credits. NAREDCO is of the view that the actual tax incidence under GST would match or be lower than the existing multiple indirect taxes on the sector. The GST rate for work contracts, which will also be offset by input credits, is expected to provide a seamless and simplified tax policy. The 12 per cent GST for construction of projects for sale to buyers will be a much required shot-in-the-arm to speed up the growth of this sector.“
Considered to be a game-changer for the sector, NAREDCO President Parveen Jain, agrees, “There is no doubt that GST will be a game-changer for Indian industry, including the real estate sector, since it will subsume more than 16 major taxes and levies into a single consolidated tax. Additionally, the unified tax regime will stop the unwanted practice of double taxation, which hurt real estate and other sectors, given their cascading effect en their cascading effect with inflated prices for end users. NAREDCO is further hoping that the GST Council will also address issues related with affordable housing segment, which was exempted from service tax in the previous tax regime.“
Clearing the air about GST's effect on home buyers, Menon, avers, “As far as buyers are concerned, continuation of stamp duty on agreement value with enhanced GST rate will increase the cost of buying real estate unless the developers pass on the benefit of GST to consumers. Given that property prices are market-driven, and seldom based on cost of construction, the expectation of any reduction for consumer who has already purchased the property seems to be far-fetched. The government is expected to generate higher revenues from increase in the tax on the sector especially due to restriction on refund of excess input tax credit. Indian real estate is driven by consumer demand and sentiments, unless the prices are brought at the realistic level, an uptick in demand curve may take some more time.“
On a concluding note, Menon explains the trend sighting an example of tax break-up for consumers, “At present, a buyer, say in Mumbai, has to pay Maharashtra VAT at the rate of 1 per cent on the agreement value. Besides VAT, the buyer also pays service tax on entire consideration at the abated rate of 4.5 per cent. Thus, the effective incidence for the buyer is 5.5 per cent (approx.) on the sale price. Going forward, under GST, though he will not pay VAT Service tax, nevertheless, he will be liable to pay GST at the rate of 12 per cent. So, clearly the tax burden for buyer will increase by around 9 per cent unless the same is compensated by way of reduced prices by the developer due to enhanced ITC.“
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