The GST And Real Estate
GST’s biggest advantage comes in the form of ease of doing business by cutting down transportation and logistics costs
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The government’s recent move aimed at bringing real estate (land and buildings) under the Goods & Services Tax (GST), is a logical extension of its landmark tax reform of introducing one tax across the nation (GST), much to the advantage of property buyers and the real estate sector as a whole.
Multiple taxes and double taxation have been one of the biggest banes of the real estate sector. On July 1, when the historic GST came into force, real estate was partially brought under it as only under- construction property came under its purview while land and immovable properties were
kept out of its ambit. Land and buildings being a state subject, there was no consensus among states, as some states feared losing their potential source of revenue by way of stamp duty.
Currently, GST @ 12 per cent is applicable to only under-construction property (except affordable housing) as it is considered a service and governed by the works contract. However, it is not applicable on completed projects or ready-to-move projects as they are not classified as immovable assets and there are no indirect taxes applicable on the sale of such properties. Similarly, land is considered immovable asset, to be kept outside GST. The stamp duty and property taxes continue to be levied separately on immovable properties. Prior to the GST roll out, a total of 7-12 per cent (average 10 per cent) tax was levied as works contract in the form of 1-5 per cent VAT (state tax) and six per cent service tax (Central tax). But after paying these taxes, property developers were not entitled to any deduction in the form of input tax credit whereas under GST, they are entitled to full credit tax on construction material, thereby resulting in cost reduction , the benefit of which they are bound to pass on to consumers. Considering, this benefit of partially bringing real estate under GST, there is a strong case for putting it fully under GST, especially as land and immovable properties are a source of black money generation and the government had taken to demonetisation and curbs on cash transactions to check it. In fact, demonetisation had a sobering effect on property prices, with the weighted average price of real estate falling after the November 8 demonetisation in major cities. Delhi’s Deputy Chief Minister, Manish Sisodia, has been a strong votary of it and even Arvind Subramaniam, Chief Economic Advisor, had called for including land and real estate under GST to check money laundering and corruption.
Now, in view of the new challenges faced by the slowing economy, the government has felt the urgency of bringing real estate under GST, which according to Ernst & Young, contributes about five per cent to GDP and is a big job creator. Taxation experts like V. S. Krishnan of E&Y, say that it is only logical to levy GST that stops at the construction stage, to final construction of residential buildings. What’s more, industry bodies like the National Council of Real estate Development (NAREDCO) support this, with its President, Niranjan Hiranandani, saying that it will save buyers from the hassle of multiple taxes during property transactions, besides reducing the tax burden and boosting sales. Global property consultancy experts like Anuj Puri of Anarock Property Consultants, say that GST will benefit all the stakeholders of residential real estate, as the perception of the sector will improve on the back of the simplified tax structure and accountability.
In addition to doing away with multiple taxes, GST’s biggest advantage comes in the form of ease of doing business by cutting down transportation and logistics costs, which will finally have a positive impact on property prices. But, it is a challenge to subsume stamp duty into one tax as it will lead to lowering of states’ revenue. And the big question is: will the Centre be able to come up with a revenue- neutral mechanism to compensate states for their revenue loss?
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