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 GST—Boon or Bane for Real Estate

Highlights

  • Input Tax Credit

  • Stamp Duty

  • Under Construction Property

Finance Tuesday, 25th April 2017   Editor: Ananya Gupta

India's most ambitious tax reform plan has to be rolled out by September 2017, in time for the expiration of older system of indirect taxation. Though the government is likely to miss the selfimposed target of launching GST by April 1st, 2017, it's making steady headways in this regard. This bill would turn the seventh largest economy in the world into a single market for the first time in the history. This is not only unprecedented but close to a revolutionary step but like every important and big step, let's make sure we don't twist our ankle. And specifically, what it means for the Real Estate sector?

 Historically, there has not been a single country in which GST has been implemented successfully. And to assume an economy as big as India would be able to implement it flawlessly would be fool's daydream. There's much debate where GST would actually help the real estate. Much of the arguments against it derives from the missing clarity over some major points of the
bill.

Input tax credit is the credit manufacturers/dealers receive for paying input taxes towards input used/purchase. It is applicable to both VAT and service tax. All dealers and manufacturers are liable to output tax and they can use the already paid input tax as an offset against it. Each state has its own version of this mechanism and norms. This is vitally important to understand some nuanced points about the debate.

 There is no explicit section of the bill saying that immovable property is excluded from the Goods and Services Tax. But there's a clear intent to not include them. Property tax, as well as Stamp duty and taxes, are not to be subsumed under GST's ambit. Another example would be not providing Input-Tax-Credit to goods and services resulting in the construction of immovable property. There is a genuine need for clarity on such issues like a mechanism for valuation of land for exclusion.  

Another aspect is the contentious provisions 9-c and 9-d of Section 16. Pre GST, the combined incidence of tax on the goods and services would be 5-7% along with the stamp duty of another 5-7% on the sale of an under construction property. Under above provisions, it is implied that there shall be no Input-Tax-Credit on 'Free Of Cost' (FOC) given to the contractors nor on the work done by them. The FOC is the scenario where the contactee/customer provides raw material to the contractor on free of cost basis. While Section 15 2-b of the proposed model GST law implies that irrespective of whether the material supplied is actually free of cost or not, the value needs to be included to determine the taxable base for the contractor. Such ambiguity could lead to double taxation.

Another ambiguity in the bill is regarding the lease rentals of commercial properties. Whether the input tax paid for goods and services for construction of a commercial property could be used as credit when such property is given out for lease rental. If such property is to be considered as 'plant and machinery', the credit would be applicable, otherwise not.


 Though riddled with many ambiguities and facing constant opposition from state government, GST is a positive force. Something which has the strength to level the playing field, not only in Real Estate sector but other markets as well. The greatest accomplishment of this bill would be the transparency. The entire sector is fraught with mistrust between builder-brokers-buyers. All transactions under GST would leave a visible and transparent audit trail, it will generate a sense of trust in the market that we absolutely need right now. Another positive effect would be a volunteer increase in tax accumulation because tax credits will not be available if one does not pay the taxes in the first place.  

Construction is the second largest employment generator in India, and has more than 250 secondary industries linked to it. It has the potential to help Indian economy to maintain and even improve the expected growth rate in coming years. The GST bill in India has been welcomed by many financial institutions around the world and would create better business practices in the future. How we implement this bill is up to our government. Whether we are going to run faster  than anybody else in history, or fall face-first on the ground, is up to us.

The world, is watching!