GST: Goods and Services Tax (GST), the biggest fiscal reform India has seen since Independence, was formally launched by President Pranab Mukherjee and Prime Minister Narendra Modi on July 1, 2017.
Real estate can be considered as a barometer of the ‘real’ health of an economy. The growth in real estate not only creates direct and indirect employment but also aids growth in various ancillary industries. As per IBEF, the sector’s contribution is expected to reach 13 percent of the Indian GDP by 2025.
The coronavirus outbreak has brought in new challenges for the sector, which was already suffering from liquidity issues, delay in construction and possession and a growing inventory. The pandemic has thrown new strategic dimensions. Work from home has become a reality in a span of few months, leading to an impact on the demand for commercial property, preference to own over lease, enhanced digitisation, impact on ‘walk to office’ vis-à-vis peripheral affordable location, etc.
The stamp duty cut in Maharashtra coupled with the historic lower level of interest on home loans has helped arrest the fall in demand and sale/booking of flats in both primary and secondary markets.
The real estate industry has seen several amendments in the taxation framework since the introduction of GST regime in July 2017. As of today, the sale of a ready property is outside the purview of GST and an under-construction property is taxed at 1 percent (for affordable housing) and 5 percent (other residential) without any input tax credit.
While the government has made efforts to support the real estate industry, there are certain GST0related challenges, if addressed in time, will help the industry to sustain its growth momentum.
To reduce the impact of the cost of acquisition to the buyer, the abatement of 33 percent towards the value of land needs to be revisited, as in many urban areas the cost of land is significantly higher. This will not only reduce the effective burden of tax on the buyer but will also ensure that the sanctity of the fundamental principle to exclude the sale of land from the purview of GST is maintained.
There is an ambiguity in terms of the applicable rate (i.e. 5 percent or 18 percent) for certain charges (such as infrastructure development charges, provision of electricity and water, society formation, etc.) recovered by the developers.
While there is a possibility that such charges are liable to 5 percent as part of the naturally bundled composite supply of construction of complex services, to remove ambiguity and align the taxation practice in the industry, the government can issue a circular to clarify the issue.
Currently, the adjustment (i.e. credit note) of GST paid in the previous financial year is permissible till September 30 of the subsequent year. Generally, construction takes around four-six years and considering the pandemic/liquidity and other factors, the buyer may cancel the booking.
In such cases, the refund of the GST already paid is not available if the cancellation is effected after September 30 immediately following the previous year. Thus, there is a need to re-visit the limitation period to claim such adjustment. This amendment will help homebuyers to seek a refund of their hard-earned money in case of cancellation.
The sale of a completed property attracts only stamp duty, whereas the sale of an under-construction property attracts both GST and stamp duty, leading to an increased cost to the consumer, whose only intention is to buy a house. Hence, to address the issue of double taxation, the stamp duty should be subsumed in the GST regime.
Alternatively, the GST on under-construction property should be waived if stamp duty is paid on the said transaction. This will align the tax impact on the sale of a completed flat and the sale of an under-construction property.
Additionally, those constructing the commercial property for lease are grappling with the issue of denial of Input Tax Credit (ITC) for the construction of the building. While the Centre has preferred an appeal before the Supreme Court, the industry expects that the government permits ITC to maintain the value chain as enshrined in the concept of GST.
The developer is required to reverse ITC with respect to apartments sold after completion. There is an ambiguity with respect to the manner in which such reversal is required to be undertaken: a) whether ITC for the period in which the flats were sold; or (b) whether ITC and turnover for the earlier period when the ITC was availed is to be considered.
If ITC is to be considered for the period when the flat was sold, then the reversal amount could be relatively very small. A clarification by the government can bring more certainty on the tax treatment and reduce litigation.
As the pandemic has reduced economic activity and has hit growth and sentiments, the government should consider and address the challenges faced by the real estate sector to support the growth momentum, which, in turn, can lead to economic recovery .(The author is Partner and Deputy Head of Indirect Taxes, KPMG in India; Santosh Sonar, a Chartered Accountant, also contributed to the article)