Call for rationalisation of GST : The Tribune India

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Call for rationalisation of GST

The twin landmark reforms of RERA and GST have resulted in a short-term disruptive impact on the real estate. The ‘flawed’ implementation of GST, however, has adversely impacted the already floundering real estate.

Call for rationalisation of GST


Vinod  Behl

The twin landmark reforms of RERA and GST have resulted in a short-term disruptive impact on the real estate. The ‘flawed’ implementation of GST, however, has adversely impacted the already floundering real estate. Though the government has brought relief by addressing some of the contentious issues, yet the Industry has called for further rationalisation of GST for the revival and growth of real estate.

The real estate industry body NAREDCO (National Real Estate Development Council) has made a case for reducing GST from 12 to 6 per cent. 

GST has replaced Service Tax and VAT, which aggregated to 5.5 per cent of the agreement value. Under the Service Tax as well as VAT law there was no levy for sales after completion of the project. Under GST, general rate for works contract is 18 per cent; however, for sale of under-construction real estate, deduction of land value is provided at one third of the sale value. Therefore, on account of land value, the GST rate is reduced from 18 to 12 per cent, which essentially results in an abatement of 33 per cent, which is less than even half, compared to abatement of 70-75 per cent available earlier under Service Tax and VAT law.

The land value effect

However, where the land value component  is high, GST at the rate of 12 per cent on total value is higher compared to GST at 18 per cent on the value excluding land. Therefore, it has been suggested that either the guidance value of land be allowed as a deduction from the sale price or the rate of GST be reduced to 6%. 

As per the earlier Service Tax and VAT law, there was a saving of about 5.5 per cent for any purchase if it was done after completion of the project which has now been hiked to 12 per cent. As such, the buyers will wait for availing high tax relief of 12 per cent at the end of project completion, thereby badly affecting sales in the under-construction stage. Thus, there is need that the GST rate for under-construction property is not more than 6 per cent on the agreement value which will make it comparable under VAT/ST regime.

Input tax credit clause

Another anomaly is that while GST is sought to be levied on completed commercial immovable property rent, input credit on such construction is disallowed, possibly on the presumption that after completion of construction there is no GST applicable. The enhanced cost burden due to restriction on input tax credit will escalate project cost. Thus, there should be a seamless flow of credit across supply chain, especially as both construction and renting is for business purposes. There is also a demand for suitable classification with regard to the resale of flats before completion/occupation so as it is not liable to GST.

Clarity on rules

Unlike in sales tax regime, under GST rules, there are no provisions for determination of the time of supply and value thereof by developer to land owner for Joint Development Agreement (JDA). The value that the developer passes on to land owner is the actual amount spent by him as the cost of area delivered free-of-cost. However, the type of construction, the amenities provided, the time it takes to construct etc, may make this value unacceptable. Therefore, the safer approach is to adopt the guidance value of the land permitted by land owner against which he receives the constructed area. As regards the timing of the supply, usually the agreement between the developer and landowner would have provision for the date of transfer of the rights to be laid. That date shall be the determining date of supply. NAREDCO has asked for laying down clear rules to avoid any ambiguity.

Change in TDR

There is also a case for removing the drawback with regard to Transfer of Development Rights (TDR) — benefit drawn for transfer by excluding it from the definition of service under Section 291 02 of CGST Act. There is a suggestion to include TDR in Schedule 3 i.e activity which is neither supply of goods and/or services in notification 9 i.e exemption notification of GST. In the case of cancellation of flat booking, if a person booked flat in ST regime, paid service tax as well  but later  cancelled his booking in GST regime, it is suggested that the developer be permitted to refund service tax to flat buyer and also given facility to adjust service tax in GST liability. And if a person books and cancels his flat in GST regime, developer should be permitted to refund GST to that flat buyer, without any time limit and also be given facility to adjust the service tax in GST liability. 

It has  also been  suggested to amend rule with regard to transfer of immovable property by way of long lease. With regard to the exemption made available under GST, only premium charged for any lease of 30 years or more to any industrial unit for industrial plots, is exempt. Similar exemption needs to be given for anyone as acquiring land on long lease is a well recognised method of land acquisition.

The provisions, with regard to transfer of immovable property by way of assignment of lease/grant of development rights, according to NAREDCO, also needs to be amended. 

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