For RERA to work well, real estate sector needs a thorough clean-up
nless the entire chain of generation of cash is thoroughly cleaned up, bureaucratic interference reduces and a simple tax structure is introduced, GST and RERA will only act as another level or impediment for the sector.
With an eye on rooting out black money, the government is planning to bring real estate sector within the ambit of Goods and Service Tax (GST). Finance Minister Arun Jaitley hasn't minced words. Speaking at a Harvard University in the US, he said: “The one sector in India where the maximum amount of tax evasion and cash generation takes place and which is still outside the GST is real estate. Some of the states have been pressing for it. I believe that there is a strong case to bring real estate into the GST.”
GST is already applicable to properties that are under construction but those that are ready for sale are out of the purview of the tax. Analysts had welcomed the GST move on the sector when it was introduced saying that it would make real estate more affordable and the sector more transparent. GST along with the Real Estate (Regulation and Development) Act, 2016 was expected to bring in the much-needed transparency in the sector.
However, RERA has failed to live up to its expectations. While the central government had laid out the outlines of the act, state governments have tweaked the rules to favour the builders.
One might say that having a regulator in place is better than having none; true, but is it not adding one more layer of bureaucracy? Builders themselves are advocating a single window clearance for a project in order to avoid the ‘cash component’ in every sale. According to them, the cash is used up to get clearances.
The builders may or may not be right but in an era when the government is promoting ‘Ease of doing Business’ getting so many clearances defeats the purpose. On top of it is the multiple and high levels of taxes imposed on the sector where the transaction value is high. Unless both these hindrances are cleared, the sector will continue to see tax evasion and cash generation. By Jaitley’s own admission there are states that want to continue with the multiple tax structure.
Stamp duty is charged by state governments on real estate sale and it has not yet been subsumed in GST. For many states, revenue from real estate transactions that generate stamp duty is one of the main sources of revenues.
As stamp duty is not part of GST, the sector is double-taxed, first when the builder purchases the land to construct the property and second, when a customer buys the property. To add to the stamp duty is the registration cost that is charged by the state government on every registration.
Even in GST, there is no clarity on how a builder can set off the taxes that he pays for procuring building materials which add to the confusion of the sector. In the end the taxes paid by the builder in purchasing the materials inflates the cost which is passed on to the property buyer.
Pilferage of taxes and cash generation in a property deal happens at the start of any real estate transaction – when the land is purchased by the builder. There is a huge difference between the ready-reckoner or the price as per government records and the price at which the deal is struck. The difference is always paid in cash.
As the project progresses, the builder encounters cash payment at various stages, which he tries to recover from the customers.
Unless the entire chain of generation of cash is thoroughly cleaned up, bureaucratic interference reduces and a simple tax structure is introduced, GST and RERA will only act as another level or impediment for the sector.For more research articles, visit our Moneycontrol Research Page.