Reality check in GST sunrise

Geetu Vaid

The first day of July, 2017 — the day when Goods and Services Tax (GST) became a reality, is a landmark in the history of tax reforms in India. There is no denying the fact that GST roll out has happened in the midst of brickbats and bouquets with winds of  scepticism and doubt blowing all around. The realty sector is also rife with speculation about its short and long-term impact. While for a common homebuyer the key question is whether GST will mean higher cost for him, the developer on the other hand is sweating over profit margins. 

In spite of the initial hiccups that are expected the industry mavens and market watchers have both given a thumbs up to the new tax regime terming it to be a positive move for the sector. “Much like the initial heartburn caused by demonetisation it would trigger some momentary disturbances, but GST augurs well for the industry in the long term. So, it is a welcome move”, says Shishir Baijal, CMD, Knight Frank India. “While there might be a marginal impact on the sector in the near term, we are definitely looking at a significant improvement in buyer sentiment and perception of this sector”, adds Anuj Puri, Chairman of  ANAROCK Property Consultants Pvt. Ltd. According to NAREDCO Chairman Rajeev Talwar, “There is no doubt that the GST Law will single-handedly solve many of the challenges faced by the real estate of the country, push the sluggish sector out of its long slumber and lead to greater transparency.”

Eye on Input Tax Credit

As GST will replace taxes like VAT, service tax, excise tax, customs duty etc creating one market across the country, for developers it would mean working in a simpler tax regime besides having the benefit of Input Tax Credit. As Ashish Sarin, CEO, Alpha Corp puts it, “One of the key benefits to the developers would be that now they will be able to take credit of the taxes paid by suppliers completely unlike in the earlier tax system. This will reduce the cascading of taxes being levied by state and central government agencies”. “The benefit of being able to claim input tax credit can also improve developers’ profit margins”, adds Puri.

Till now the developers were passing on the burden of multiple taxation to buyers as they were paying different taxes at different levels at various stages of a project. As Anuj Puri explains, “On various construction materials they purchased, builder paid customs duty, central sales tax, excise duty, entry tax, etc., thus creating various instances of multiple taxation and the cumulative burden eventually got passed on to the buyer.” However, it will be a bit too soon for the buyers to cheer and start expecting a drop in prices as there are certain grey areas regarding the input tax credit as it will be applicable for the projects that will be undertaken after the implementation of the GST regime. “It is important to note that the developers will not be able to avail full ‘credit’ of taxes paid by suppliers for the projects that are under a transitional phase, as traders were not issuing the excise invoice for the materials bought from them by the developers. For such projects the government has restricted the limit at 60 per cent of the GST”, says Ashish Sarin.

Price — The big question

Thus, it is evident that GST may not bring the prices of property down, but it is surely going to have a long-term impact in improving market sentiment through a simpler tax regime. According to experts its effect on prices is going to be neutral. But it will give an extra thrust to the affordable housing segment. Government has made it amply clear that buyers should not be burdened with extra tax. In view of complaints from certain quarters regarding buyers being asked to make entire payment before July 1, 2017 or to face higher tax, the Finance Minister Arun Jaitley made it clear that it was not a right demand and the developers should pass on the benefits of input tax credit to buyers or else they will have to face action under anti-profiteering rules. As per the rules, if the Directorate General of Safeguards (DGS) after investigation finds that the benefit of price reduction has not been passed to consumers, the anti-profiteering authority will ask the business to refund the same to the consumers.

Challenges to overcome

Thus, the implementation of GST will be a challenging task, especially in the case of the real estate sector. Some of these are: 

n The authorities have not agreed for centralised registration and this will increase the compliance cost of the developers. “There will be a considerable increase in the number of returns filed due to this”, says Sarin.

n The valuation of land in the payment of taxes is another major challenge for developers who are expected to pass on the ITC benefits to buyers. As proposed earlier, stamp duty has not been summed up in GST. Hence, if the government does not come out with the abatement of the land value in the valuation of taxable amount, it will lead to double taxation of the land being transferred to the buyer during execution of the project. “In case of a joint development project, total taxable value of land will be a matter of concern. In the coming times, this should get addressed by authorities and courts”, adds Sarin. The buyers may end up paying higher cost in absence of abatement of the land.

— With inputs from ANAROCK Property Consultants Pvt Ltd.

The single tax edge

n Any real estate product comprises three expense components — land, material and labour or service costs. VAT is calculated on material cost, and service tax is calculated on labour and service cost. It is very difficult for buyers to ascertain what components were included for calculation of VAT and service tax. The implementation of GST makes the calculation much simpler now.

Conceptualised around a ‘One Nation, One Tax’ philosophy the new tax regime will:

• Help eliminate the previous cascading tax structure
• Ease compliances
• Create uniform tax rates and structure, and
• Help in reducing additional tax burdens on consumers.

New tax table for construction materials

• Cement will be taxed at the rate of 28 per cent under GST, which is higher than the current average rate of tax around 20-24 per cent
• Iron rods and pillars will be charged at the rate of 18 per cent, which is similar to the average rate of 20 per cent under the old taxation regime
• Paint, wall fittings, plaster, wallpaper and ceramic tiles will be taxed at 28 per cent, which is also similar to the previous average rate of 20-25 per cent.
• Sand lime bricks and fly ash bricks will be taxed at 5 per cent, which is lower than the previous rate of 6 per cent.
• However, the marginal change in the percentage of these variables will make a huge difference as transportation and logistics costs reduce in the single taxation system.