How Will The GST Bill Impact The Real Estate Sector in India.
GST bill has been one of the longest awaited tax reforms.The GST bill also got unanimous approval of both houses of parliament in 2016’s this monsoon session 2016. Union government of India has set a deadline of April 2017 to roll out this bill. As of now three states have already endorsed the bill and others will quickly follow. How the bill will impact tax systems in residential real estate transactions has got reviews of varied industry experts. In this article, we will try to detail out the issues involved to give a better understanding of these various views.
Let’s first understand the various taxes applicable in a residential & real estate transaction.
- Service Tax – If you are purchasing a property which is under construction, the developer will have to charge you service tax and deposit it with the central government. This tax was not applicable till 1st July 2010. Hence rules regarding taxes on work contract were not applicable on residential complex construction. In 2010 the government passed the finance act, the government added an explanation to the definition of construction of residential complex. For the sake of simplicity, the government gave an abatement of three-fourth of the cost of the unit as land and goods for construction and only quarter of the cost of the unit is treated as service. Hence presently most homebuyers are paying 3.75% of the cost of the unit as service tax. Recently service tax on under construction property has again been put under question as Delhi High Court ruled counted against this and matter is sub-judice at Supreme Court of India.
- VAT (Value Added Tax) – If you are purchasing an under-construction property, you will have to pay a supplementary VAT in some states. Developers charge this VAT and deposit it with state government. VAT has also been under dispute for long time period and still there are many states such as UP who do not charge VAT. Also unlike service tax, there is no uniform way of gauging VAT across states. E.g. in Maharashtra under composition scheme VAT is charged as 1% of agreement value whereas in Haryana the same bid was passed but not yet agreed by developers. In Karnataka VAT is charged at 5% of accord value of the unit. To calculate an accurate value of VAT and not use composition scheme, developers will have to sustain proper accounts of goods purchased for construction and VAT paid by them for the same to get input credits which are bulky and makes it tough for buyers to understand.
- Stamp Duty – Stamp duty is owed by state authority, again at varying rates, for registration of sale agreement for real estate transactions.
Fortuitously if you are purchasing a ready to move-in property directly from the developer after he has attained completion certificate from real estate authority , you don’t need to pay service tax and VAT hence saving 3.75% to 9% of equity cost depending on the state where you are buying property.
Now let’s apprehend how the GST bill will impact these three taxes. Service Tax and VAT will be reinstated by the Central GST and State GST whereas stamp duty will stay unchanged.
There are two open issues because of which it is difficult to predict accurately the impact of GST on real estate purchase. One is the GST rate and the second are declined for land value in total agreement value of under construction residential unit. Now let’s take assumptions on these two items to estimate the impact of GST. This hypothesis might be off but has a high probability of being correct as well. GST rate might be set at 18% as many experts back this rate and the decrease of land might be only 25% of accord value as 50% is assumed to be a cost of goods and resting 25% as the cost of service. Based on these assumptions the effective GST on under construction assets transaction will be 13.5% (3/4th of 18%). Now this rate is significantly high compared to 3.75% – 9% currently being paid. Hence we can assume the cost of buying under-construction property will greatly increase after GST becomes applicable from 1st April 2017.
But this might not be accurate. Currently, developers pay service tax and VAT on services and goods they procure for the construction of populous complex but are not allowed to take input credits of this tax because of which end customer pays tax on tax. As per opinions were given by builder community this tax on tax adds up to 20 – 25% of the cost of the residential unit. Hence if GST is resolved and builders are allowed to take free credits of input tax paid, the cost of a unit should curtail by 20% at least. To understand this better let’s take a case of a residential apartment which is sold at Rs 100 today finally cost end client 103.75 in Uttar Pradesh excluding stamp and registration duty. If the post-GST price of a unit is curtailed by 20% i.e., it becomes Rs 80 then final cost to end customer will be 80 + (13.5% of 80) i.e., Rs 90.8 which is much lower than that of Rs 103.75. So in fact, if developers pass the benefit, which they will get from GST, cost to end customer actually will reduce.
But it is easier said than done. First of all current under construction businesses are at different stages of construction and developers would have already paid service tax and VAT for procurement of goods and services for which they will not get input credit. Hence cost reduction will be lesser than 20% for current under construction project. Second model GST bill clearly mentions input credit will not be available for goods and services purchased for execution of work contracts. Presently we have seen two different interpretations by courts of whether construction of residential complex is a work contract or not. If it is treated as a work contract cost of developer will not reduce at all after GST implementation. Another issue which needs to be kept in mind is, presently government does not allow input credit if the composition scheme (i.e., abatements for the cost of land and goods) is used by developers for calculating service tax and VAT.
Therefore at present, we are more likely to believe that cost of under construction residential unit will increase post GST implementation. This will be a hefty blow to the industry, which is already suffering from slow sales. Industry bodies need to urgently engage with government to minimize this impact by clarifying the position on works contract, composition scheme and already paid service tax and VAT by developers on under construction property.