The real estate sector is estimated to account for about 5% of India’s gross domestic product (GDP) and is considered as the 2nd largest contributor in the GDP of the India.
The sector faces issues in terms of external environment conditions and fiscal policy decisions. The challenge is the management of the multiple indirect tax levies, such as VAT, SERVICE TAX, EXCISE, STAMP DUTY and REGISTRATION fees.
GST is to subsume multiple indirect taxes that will simplify tax compliance and minimize the scope for double taxation. So, there is clear reason for home buyers to cheer, even if they have to pay slightly more in case the standard GST rate is high.
GST would bring a lot of transparency and accountability in the real estate sector and minimize unethical transactions. Under the current tax laws, VAT and Service tax charged by different Contractors and excise duty, entry tax, octroi is paid on the procurements. GST law will increase the margin in the hands of contractor/developer by removing all the current taxes. Now whether this benefit gets passed on to the end-consumer is unsure as pricing of real estate is driven by market forces than on costing principles.
GST tax rate on construction material
Current tax regime is 5.5% on construction flats that will increase to 12% but ITC made available to promoters/ developers will reduce the impact of tax liability on cost of the projects. Also, GST will subsume various taxes like vat, service tax, excise duty, entry tax will also help to reduce administrative cost of developers. Stamp Duty will be applicable on sale of flats and units under GST regime.
In the bracket of 18-28% various items are included that are glass, aluminium, ceramic, lamps, monuments stones, and fittings, it can be expected that cost of luxury projects and commercial projects may rise if input set off not utilized properly. Higher rate of tax will lead to increase in cost of construction.
Most of the construction material falling is under the 18% and 28% slab.
Important issues in real estate sector
Crucial aspect with relation to transitional provisions is issue relating to ongoing contracts. For example, service tax liability is discharged based on completion of services method i.e. as and when milestones become due. Whereas, full VAT is paid based on agreement value or market value. Accordingly, in case of ongoing contracts, a situation may occur wherein full VAT is discharged but only part service tax is paid on the same flat. Accordingly, issue may arise as to proportion of payment of GST on such flats. Such issue is dealt with in Section 142(11) of the CGST Act/SGST Act wherein it has been provided that proportionate credit of full tax paid earlier may be available.
Floor Space Index (FSI)/Transfer of Development Rights (TDR)
FSIs/ TDRs used by the Builders are effectively rights in land. As per Schedule III of the CGST Act/SGST Act not all immovable properties are excluded from ambit of GST but just sale of land. Accordingly, there are chances that such transaction of sale of FSI/ TDR may attract tax under GST. However, according to another school of thought FSI/ TDRs may still be counted as ‘part of Land’ and therefore stands excluded from GST net.
Intellectual Property Rights
Schedule I of the CGST Act/SGST Act provides for levy of GST on supply of goods or services or both between related persons or distinct persons even when made without consideration. Usually in the Real Estate Sector, many entities of same group use single logo/ trademark without any consideration.
Many times, stock of several items such as cement, steel is transferred from one site to another. GST warrants for levying GST on all supplies. Accordingly, interstate stock transfers shall be liable to GST.
Many barter transactions are witnessed in Real Estate industry. For Example, giving away of free flats in lieu of ‘development rights’. Many experts have been taking a stand under several state VAT laws that such barter transactions are not subjected to VAT on the basis of the term ‘valuable consideration’. Further, the valuation of such transfers is also a burning issue under present service tax law. However, Section 7(1) (a) of CGST Act/SGST Act provides, amongst other things, for levy of GST on all forms of supply such as barter, exchange, etc. Therefore, GST shall be payable even in barter transactions. The value of supply shall be determined in accordance with GST (Determination of Value of Supply) Rules.
Section 171 of CGST Act/SGST Act provides for commensurate reduction of prices based on benefit availed by way of introduction of GST such as reduction in rate of tax, benefit of ITC. The Rules in this regard as to the quantum of reduction, manner of reduction is not yet notified. Therefore, unless clarity is brought in this regard, the possibility of different practices being adopted in the Industry cannot be ruled out.
The impact of GST on real estate sector is expected to be same as under the current taxation system. The major benefit from GST in real estate is that, it will bring transparency and accountability in the activities. The buyers will able to avail the benefit of many taxes which will be subsumed by GST.
In case you are confused about GST as a business owner, feel free to consult the GST experts at LegalRaasta. You can get comprehensive assistance on GST Registration and GST Return Filing. You can also use our GST software for doing end-to-end GST compliance