The Government could also play a part in softening its position relative to Mutual Agreement Procedure in the treaties, specifically by allowing for bilateral Advance Pricing Agreements (APAs) even in cases where Article 9(2) dealing with correlative relief for Associated Enterprises is not present in the respective treaty.
Mahesh Jaising / Prashanth Bhat
Real estate industry in India in the recent past has seen a phenomenal growth, not just in the Tier 1 cities, but even Tier 2 and Tier 3 cities and towns. The industry is in the cusp of increased regulations, with bills such as the Real Estate (Regulation and Development) Bill, pending for approval in the side lines. GST is another development that will have a significant impact on this sector.
Even though construction services has been taxable under VAT and service tax for a decade or so, the industry is still plagued with uncertainty on key basic issues that remains unsolved leading to intense litigation, especially on issues like transfer of development rights in land, taxability of joint development agreements, taxable value for goods and services, etc. While it is expected that immovable property transaction, ie, transfer by way of sale of immovable property after completion, would continue to be outside the purview of GST and be liable only to applicable stamp duties, the proposed shift to the GST regime is expected to usher in the wings of change and wipe the slate clean in a bid for a fresh start on the indirect taxation of all other real estate transactions. However, the foremost thought in everyone’s mind is whether GST is indeed the solution to an industry riddled with complex structures and issues.
Today, this industry has two primary levies, Service tax and VAT, with overlap of tax base and constant disputes on the rate of tax, given the multiple options available for discharge of taxes across States. This has resulted in diverse practices being followed by developers, across geographies and even within each State. These issues should be put to rest under the GST regime and the practices and positions should be common across India. Hence, the taxes paid by a home buyers across States should more or less be the same.
Presently, home buyers pay service tax and VAT on purchase of residential units when booked prior to their completion. There are also various elements of non-creditable tax costs, like excise duty, customs duty, CST, entry tax, etc paid by the developer on his procurement side, which is inbuilt into the pricing of the units. All these tax costs add upto anywhere between 22%-25% of the price of the units. The proposed GST should replace these multiple taxes with a single tax and should also ensure smooth flow of credits through the chain. Hence, it is widely expected that GST should reduce the construction cost in the hands of the developer and thereby aid in reducing or atleast maintaining the current level of prices in the real estate sector. The only dampner could however be high GST rates (like the 27% GST rate that is doing the rounds) which will offset any possible gains on incremental credits. Stamp duty is not proposed to be subsumed under GST and hence will continue as it is today.
The Supreme Court’s decision in L&T that VAT to be applicable only on construction carried out after agreement of sale was a game changer for VAT and the industry is still grappling with the impact of the same on payment of taxes and availment of credit. This principle could continue to apply even under the GST regime, as there can be a supply of goods and services only from the date the agreements are entered into with the buyers, unless the GST legislation introduces a deeming fiction.
GST should have a significant impact for commercial property developers, who today are burdened with high costs as no credit is available on construction services used for developing a commercial property which is then rented out. It is expected that under the GST regime, there should be a smooth flow of credit and current restriction on construction related credits not being available for offset is expected to be removed. This would help reduce the project costs in the hands of the developer, which should have a positive effect on rentals. If the credit restrictions continue, due to higher GST rates, the project cost are only going to get escalated further. Additionally, all business entities, including the trading companies should be able to take credit of the GST paid on the rentals, which in turn should help the developer community in negotiating better rentals. To recap, under the current regime, service tax on rentals to traders, is not available as a credit.
SEZ projects should by and large be neutral as the present exemptions on the procurement side should transition into GST as well. It is expected that supplies of goods and services to SEZ developers and units will be zero rated.
Under the GST regime, special focus would be required on the taxability of landlord-developer transactions, especially on the taxation, valuation and timing for payment of taxes on such transactions and also on the liability of landlords for sale of their portion of constructed area before completion of construction.
Overall, GST appears to be a benefactor for the real estate regime, primarily in light of the expected free flow of credit, which should translate into an increase in margin in the hands of the developer. Whether these benefits will percolate into the end customers / users is to be seen, more so because pricing in this sector is more driven by market forces than on costing principles. More importantly, as the GST regime is expected to impart greater transparency through market mechanism, it is imperative that real estate transactions forms an integral part of the proposed GST design.
Authors are Partner and Director at BMR & Associates LLP, respectively.
Views are personal