By Jaxay Shah
The implementation of the Goods and Services Tax (GST) has been the biggest tax reform in India since Independence. Subsuming over 17 indirect taxes levied by the Central and State Governments into one has led to a huge reduction in compliance costs for businesses. GST has led the integration of an entire nation into a single market for the first time – ushering a new dawn of the ‘One Nation, One Tax’ regime.
Any new regulation or law is bound to experience certain teething issues before its benefits are fully realised by its stakeholders, and in this case, the entire economy. After its first 12 months, it is safe to say that it has been quite an eventful year with some of the provisions of GST having been subjected to revisions in the recent past. GST has also had to face criticism from different stakeholders with many questioning its feasibility and its stipulated long-term advantages.
The real estate sector, although not in its entirety, was brought under the purview of GST to reduce property prices and enhance transparency while eliminating the cascading effects of taxes. Being the second largest employer of the economy and 5-6 percent contributor of the GDP - with the number expected to increase to 11 percent by 2020 (According to a report by CREDAI and JLL titled ‘Traversing Through The Epic, Predicting The Curve’) - it is imperative for the new regime to look into and address the issues currently faced by the sector is widely expected to lead the growth of the Indian economy.
GST is right in all its intentions. However, CREDAI believes that some of the clauses and provisions need to be further amended for the smooth functioning and growth of the industry, protecting the homebuyers and achieving the mission of Housing for all by 2022.
1) GST Rate and Stamp Duty - The current effective GST rate levied at 12 percent is too high and needs to be brought down. For houses up to 60 square meters, Government has brought down the GST rate to 8 percent. However, it needs to be remembered that real estate is subjected to stamp duties between 5-8 percent by states which leads to a cascading effect and cost escalation which is detrimental to the cause of Housing for All by 2022. States should either eliminate stamp duties on homes or reduce it to no more than 1 percent for the benefit of ‘Housing for All’.
2) Land Abatement Rate – Construction being a service under GST has been levied 18 percent tax, with 33 percent being the land abatement rate; making the effective tax rate 12 percent. Land being the costliest in the construction process and with land prices surging gradually, the current abatement rate is not adequate. In metros, the land cost is about 50 per cent of the total cost which needs to be considered. The abatement rate needs to be increased to 50-60 per cent in metro cities. For Tier II, III & IV cities, 33 per cent is adequate.
3) Transfer of Rights - Transfer of rights and Joint Development Agreements were earlier not subject to service tax. They are in the nature of immovable property. Hence, they should not be subjected to GST
4) Slum rehabilitation projects - Slum rehabilitation is the need of the hour in most of the metros in order to redevelop key areas to be able to provide a better lifestyle and infrastructure to the citizens of the region. For such projects to be viable, Input tax credit on units transferred to slum dwellers should be allowed or total GST liability should be restricted to only the units meant for sale and not those given back to slum dwellers.
5) Lease Premium – The lease premium charged by development authorities is in the nature of sale of land. Government has excluded lease premium charged for industrial plots from GST. On the same reasoning, lease premium paid to Development Authorities by developers should also be excluded from the purview of GST.
A year since GST, there is no doubt that the real estate sector has seen greater transparency. However, the industry requires a major push to move towards higher growth. For the real estate sector to usher a new era of progress and development for the country, it is imperative for the taxation environment to be highly conducive for all stakeholders of the Indian realty sector. This will also provide a further boost to crucial Government initiatives such as Housing for All by 2022 and the Smart Cities Mission.
The author is President of CREDAI National. Views expressed are his own.
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