Decoding GST. For illustrative purpose only

Transcription

1 Decoding GST Goods and service tax, in short GST, is the new taxation system adopted by the government of India. GST is has been introduced with an objective of upgrading the indirect tax system in India. Brought in force on 1 st of July 2017, GST will be a combination of all the taxes that were levied by the centre, state and local bodies under the bygone regime. As of July 2017 all UTs and states, except Jammu and Kashmir have passed their respective SGST acts. Below diagram depicts the list of indirect taxes that stand to be replaced: For illustrative purpose only

2 What was the need? The previous indirect tax regime was considerably complex because of lack of standardization. Though central taxes were uniform, there were significant variations in state level taxes. Variations existed in the taxation rates, list of applicable taxes, exemption criteria etc. As a result, doing business between two states led to a lot of confusion and paved way for malpractices such as arbitrage. Furthermore, the previous system was subjected to cascading of taxes i.e. taxes were levied repetitively at each stage of production until being sold to the end consumer. Though tax credit existed in form of CENVAT the benefits were negligible due to is complexity and limited scope. In view of this, the Indian Government introduced GST which will have standard rates throughout the country. The idea of implementing GST in India was first put forward in As per the original stance, the bill was proposed to be introduced in April However, it took seven years for GST law to finally become a reality. Some quick facts GST is a dual tax i.e. it will be shared between the state and the centre government. Generally, levy will be divided equally among the two authorities. For example, in case of tax of 18 per cent on a product or service, 9 per cent will go to centre as CGST and the remaining 9 per cent will go to state as SGST. GST Act consists of: State GST (SGST)/(UTGST): the component which will be levied by the state government or union territories. Central GST (CGST): the component that will be levied by the central government. Integrated GST (IGST): the component that that will be levied in case of interstate trade The entire bouquet of goods and services are categorized into four tax slabs: 5%, 12%, 18% and 28% to make the system simpler. In case of interstate trade IGST will be levied by the central government. GST has a well-defined structure for input tax credit (ITC). ITC allows deduction of amount already paid as input tax from the output tax. ITC generated from CGST can be adjusted only with CGST or IGST. Likewise, SGST can be adjusted only with SGST and IGST. Furthermore, as per the anti-profiteering measure of the GST act, it will also be mandatory for the supplier to pass on the benefit to the consumer. To ensure this, the Anti-Profiteering Authority will be well equipped to monitor, identify and penalize the violators. GST will be a destination based tax system. In other words, GST will be levied in the state where the goods or services are consumed. This is in contrast to the previous regime where the tax was levied in the state where the good or service originated. GST features a more comprehensive reverse charge mechanism (RCM) which unlike the previous regime also covers goods. Basically, RCM penalizes any receiving entity which does business with non-compliant suppliers by making them pay the GST. Entities with a turn-over of less than 20 lakhs will be exempted from GST, with some exceptions.

3 The realty angle Real estate such as apartments, office spaces, shops fall under the category: Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. However, ready to move properties, i.e. properties which have received occupation certificate, have been exempted from paying GST. Initially the GST for the category was set at 12 per cent with provision to allow full input tax credits. However, in a revised order the government has updated the rate to 18 per cent. The revised order also allows exemption of land value, not exceeding one-third of the total property value, for calculating the GST. Hence, straight away GST will be applicable only on two-third of the property value making the effective rate 12 per cent. As GST will not be applicable on properties that have received O.C. developers will not be able to claim ITC on such properties and thus they will pass the burden of input taxes on the consumers. However, it will be too early to say the kind of effect this will have on the final price of the property. Rental income, from residential property has been completely exempted from GST. In case a property is rented out for commercial purpose, income over Rs 20 lakh will attract GST of 18 per cent. During the previous regime, cost of property included multitudes of taxes incurred on inputs such as steels, cement, labour, transportation etc. Taxes on most of the construction material varied between 12 to 14 per cent. Owning to the limitations of CENVAT credit system, the developer had to incur most of the input taxes. These were subsequently passed on to the buyers. However, this component was not visible to the customer as it formed a part of the basic cost of property. The only visible amount by the way of taxes were Service tax and VAT charged during the purchase stage. The concept of ITC will eliminate the invisible cost additions thereby bringing down the final price of property. It will not be feasible to compare pre and post GST rates directly.

4 For illustrative purpose only

5 Implications Overall GST is expected to bring long term advantages to the Indian economy. Some of the key advantages include: Provision of Input Tax Credit is expected to bring down property prices as it will eliminate cascading of input taxes. However, it is early to understand the exact effect of GST on prices. Strong anti-profiteering measure will ensure that the benefits of ITC are always passed on to the consumers. GST will bring transparency in the taxation process. This will boost the trust levels of home buyers. A sound and efficient taxation system will improve confidence among Private Equity players and attract more and more foreign investment. GST is supported by a strong online platform. This has ensured that every-thing is accounted for in a timely manner. Draw backs: GST will impose comparatively higher compliance burden on businesses. This may cause a marginal increase in operational expenditures. However, in the long run the advantages of GST will level this out. The timing of GST has coincided with RERA which too involves significant procedural upgrades and paper work. With the introduction of GST the realty businesses will have to go through two major policy transitions at the same time. As a result, the market is expected to slow down a bit in the short term. GST awareness has not been handled well. The image of GST has been hampered because of negative publicity. Home buyers are confused as to what they can expect out of GST. Strong measures are required to be taken in this direction.

6 Contact Us Rohan Masurkar Associate Manager, HDFC Realty Sruthi Kailas Associate Manager, HDFC Realty Follow Us HDFC Realty Our Apps Market Watch by HDFC Realty A free knowledge sharing app which updates you on latest happenings in the Real Estate Sector. Download Now Disclaimer The information contained in this article has been gathered from various sources published in different domains. HDFC Realty Limited ( HRL ) has reproduced the articles verbatim. HRL does not vouch for the accuracy of the information and is not responsible for decisions that may be taken on the basis of information provided in this article. No reliance should be placed for any purpose whatsoever on the information contained in this document or on its completeness. HRL does not accept any responsibility for any error whether caused by negligence or otherwise or for any loss or damage incurred by any one in reliance on anything set out in this article. HRL disclaims all liability, responsibility and negligence for direct and indirect loss or damage suffered by any person arising from the use of information presented in this document. Nothing in this Article is intended to constitute legal, tax, securities or investment advice or opinion regarding the appropriateness of any content and information hereinabove. The use of any information set out in this article is entirely at the addressee s own risk. The information contained herein is intended solely for the private usage of the addressee(s).