IMPACT OF GOODS AND SERVICE TAX (GST) ON INDIAN REAL ESTATE SECTOR

Transcription

1 IMPACT OF GOODS AND SERVICE TAX (GST) ON INDIAN REAL ESTATE SECTOR Dr. D. K. Parmar1, Dr. S. K. Dave2 1 Lecturer, Applied Mechanics Dept., B & B Institute of Technology, V V N, Gujarat, India 2 H.O.D., Civil Engineering Dept., B & B Institute of Technology, V V N, Gujarat, India ABSTRACT GST also known as the Goods and Services Tax is defined as the giant indirect tax structure designed to support and enhance the economic growth of a country. More than 150 countries have implemented GST so far. However, the idea of GST in India was mooted by Vajpayee government in 2000 and the constitutional amendment for the same was passed by the Loksabha on 6th May 2015 but is yet to be ratified by the Rajyasabha. However, there is a huge hue and cry against its implementation. A single indirect tax which covers all goods and services will, in the long run, increase tax collection by making it easier for retailers and several other businesses to comply and also moderate overall taxation levels. That said, it should be remembered that the favourable effects of this new taxation regime will become evident only within 2-3 years of its implementation. Though the goods and services tax (GST) tax structure has been announced, there is still a lot of conjecture about which tax rate will be applicable to the real estate and construction industry. INTRODUCTION The switch-over to the GST regime is undoubtedly one of the biggest tax reforms in postindependence India. From July , GST effectively cuts through a confounding Gordian knot of taxation complexity in the country. In other words, it replaces the multiple taxes levied by the central and state governments and will become subsumed of all the indirect taxes, including central excise duty, commercial tax, /charges, Value-Added Tax (VAT) and service tax. [1] However, the biggest game changer in GST is the introduction of Input Tax Credit, whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. This makes GST fundamentally a tax only on value addition at each stage. [2] This means that the end consumer will thus only bear the GST charged by the last dealer in the supply chain, with set-off benefits at all the earlier stages. To ensure that manufacturers, Page 1

2 developers and service providers pass on the benefit to the final customer, the Government has included an anti-profiteering clause in the GST bill under section 171 of GST law. This clause clearly states that it is mandatory to pass on the benefit tax reduction due to input tax credit to the final customer. [3] [4] The various taxes were applicable in a residential real estate transaction before GST 1. SERVICE TAX If you are purchasing an under-construction property, developer will have to charge you service tax and deposit it with central government. This tax was not applicable till 1st July The key reason for the same was contract between builder and buyer for construction of residential unit was disputed as works contract as it also includes value of land. Hence rules regarding taxes on work contract were not applicable on residential complex construction. In finance act 2010, government added an explanation to definition of construction of residential complex and made it deemed service. [5] For the simplicity sake government has given abatement of 3/4th of cost of unit as land and goods for construction and only 1/4th of the cost of unit is treated as service. Hence presently most homebuyers are paying 3.75% of cost of unit as service tax (1/4th of 15%). Recently service tax on under construction property has again been put under question as Delhi High Court ruled against this and matter is sub-judice at Supreme Court of India. [5] 2. VAT (VALUE ADDED TAX) If you are purchasing an under-construction property, you will have to pay additional VAT in some states such as Karnataka, Haryana and Maharashtra. Developers charge this value added tax and deposit it with state government. VAT has also been under dispute for long time and still there are many states such as UP who do not charge VAT. Also unlike service tax there is no uniform way of computing VAT across states. To calculate accurate value of VAT and not use composition scheme, developers will have to maintain proper accounts of goods purchased for construction and VAT paid by them for the same to get input credits which is cumbersome and makes it tough for buyers to understand. [6] [7] 3. STAMP DUTY Stamp duty is charged by state government, again at varying rates, for registration of sale agreement for real estate transactions. Incidentally if you are buying a ready to move-in property directly from developer after he has obtained completion certificate from authority, you don t need to pay service tax and Page 2

3 VAT hence saving 3.75% to 9% of property cost depending on state where you are buying property. [8] [10] IMPACT ON RESIDENTIAL REAL ESTATE: The real estate sector is estimated to account for about five per cent of India s gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from However, the sector faces issues in terms of macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multiple indirect tax levies, such as VAT, service tax, excise and stamp duty and registration fees. To say the least, the Indian real estate sector has been going through significant transform in the recent times. The recently implemented Real Estate and Regulation Act (RERA) has already started addressing the issue of non-transparency and affixes a level of accountability on real estate builders and brokers which is unprecedented in the history of the Indian property sector. [7] For the residential real estate sector, the implementation of GST will definitely be a positive sentiment booster among property buyers. GST may not be instrumental in bringing down the prices of residential real estate over the short term. However, it will benefit all the stakeholders of the residential real estate sector, as the perception of the sector will improve on the back of a simplified tax structure and accountability being fixed at every stage. [9] IMPACT ON RENTAL HOUSING Other doubts pertain to the rental housing market, which would naturally be impacted if the government were to tax residential leases under GST. The common apprehension is that if this were to happen, the rental housing segment may see a huge slump over the medium-term, since residential leases are currently not taxed at all. [10] Here, it is pertinent to note that residential leasing is an inherent demand which will not evaporate merely by higher taxes. Certainly, we may be looking at a rental stagnation or marginal decline as the market readjusts to the new dynamics which GST will infuse. However, rental housing demand is sticky and end-user-driven in nature, so we are definitely not looking at a major slump in this segment because of GST even if it does tax residential leases. [11] Page 3

4 That said, rental yields in major cities could certainly moderate if GST is levied on rental housing. In India, rental yields in housing are quite modest at around 2-4% on an average. Rents may either hold steady or decline marginally due to increase in housing stock. However, it is also true that most investors in the residential sector do not invest for rental yields but rather for the capital value appreciation, so reduced rental yields would not independently impact sentiment. [12] [15] IMPACT ON COMMERCIAL REAL ESTATE When it comes to GST's impact on the commercial office real estate market - with the existing service tax for commercial leases at 15%, GST would be likely neutral overall (at 12% slight savings, and at 18% slight increase). [13] IMPACT ON AFFORDABLE HOUSING Affordable housing was previously exempt from service tax. The affordable housing sector, which is a major thrust area of the incumbent Government and is the cornerstone of its 'Housing for all by 2022' vision, will not be impacted by GST. This has been clarified by the announcement from the Finance Ministry, which indicates that there will be no tax under GST for housing projects which comes under the affordable housing scheme. [10] [14] CONCLUSION GST will free end-consumers from the hassle of paying several state taxes at different levels, therefore removing the double taxation impact. Also, the implementation of GST will hugely benefit the NRI community towards investment in real estate through the formation of a seamless all-inclusive channel. The existing channels include issues of multiple taxation and amounting to indirect taxes and no uniformity. In totality, GST will add up as another factor among the government s other schemes towards affordable housing, which is beneficial to the growth of the sector. Buying a home will now be easier as benefits will now be extended to both the developers and the endconsumers, REFERENCES 1. Agogo Mawuli (2014): Goods and Service Tax- An Appraisal Paper presented at the PNG Taxation Research and Review Symposium, Holiday Inn, Port Moresby, Girish Garg, (2014), Basic Concepts and Features of Good and Service Tax in India. Page 4

5 Ehtisham Ahamad and Satya Poddar(2009), Goods and Service Tax Reforms and Intergovernmental Consideration in India, Asia Research Center,LSE, Page 5