Building GST, block by block

Geetu Vaid

The last day of June in 2017 was full of trepidation for stakeholders in the realty sector as the dawn of July 1 was going to mark the beginning of the era of ‘one nation one tax’. The end users as well as developers were looking for clarity about the tax slabs and the impact of the new tax on property prices.  Will the home prices ease? Will there be some effect on home loans and rental income? — These were some of the questions being raised at that moment. One year later, and after “living” in the Goods and Services Tax (GST) regime for 12 months, the apprehensions persist as the quest for clarity on certain key points continues. While assessing the impact of the new tax regime in the past 12 months, industry mavens don’t deny the fact that it has been a bitter-sweet journey towards a more “transparent  and regulated” real estate sector that will be free from the snowball effects of multiple taxes. 

Issues to address

While GST is a beneficial measure, the fault lies its implementation. There are a number of loose ends that have to be secured before homebuyers can savour its real benefits. Over the past year a number of issues have been raised by industry mavens on different platforms which need immediate attention. 

Stamp duty: The demand for rationalisation of stamp duty and registration charges has been gaining momentum these past few months.  States levy stamp duty of between 5-8 per cent and as of now it has to be paid over and above the GST of 12 per cent. “Stamp duty and registration as also any other additional levies should be subsumed into GST. This will bring down the total tax payable by the home buyer, and it will have a positive impact”, says Niranjan Hiranandani President, National Real Estate Development Council (NAREDCO). Expressing concern over the threat of cost escalation due to this Jaxay Shaw, President , CREDAI, National, offers a solution.“States should either eliminate stamp duties on homes or reduce it to no more than 1 per cent for the benefit of ‘Housing for All’.” 

Construction material cost: Increase in the cost of construction materials over the past 12 months has been a matter of concern for developers. Though GST was aimed to reduce the cost of construction material, the ground realty is very different. Over the past year, most of the supporting industries have hiked the basic price of the material and the benefit expected from GST has lost its  relevance.  Explaining this Catch 22 situation, Rattan Hawelia, Founder & Chairman, Hawelia Group, says, “The component of GST for cost of construction has been fixed at 12% against which the rebate being forwarded by the developers is ranging from 3 to 6%, depending upon the stage of construction of the project at the time of introduction of GST last year.  Considering this, the cost of taxation itself has been increased for the end user i.e. before the implementation of GST the service tax charged was 4.5% being 30% of the total tax whereas currently the GST being charged is 6% thereby giving additional burden of 1.5% on the end-user. The direct impact on the flat buyer has increased in the cost of property instead of what the GST was aimed at”.

Grey zone: Other grey areas include lack of clarity regarding the abatement for land cost for calculating tax for under-construction projects. The impact of GST on real estate prices actually hinges on the abatement rules. However, the inicdence of shady transactions has reduced considerably and there is more transparency and accountability. 

The clouds of slowdown are still hanging low on the sector and thus it is important to have a conducive taxation environment. A more streamlined tax structure will bode well for the sector. Thus, it is time for the governement to work on building a sturdy edifice of GST. 

Impact on housing

The first few months after the implementation of GST were the toughest for the realty sector, as end users deferred their purchases due to lack of clarity over the tax slabs and lack of an effective formula for getting input tax credit (ITC) from the developers. As projects with occupancy certificate (OC) did not fall under the ambit of GST, there was a spike in the demand for ready-to-move-in units. Sale of under-construction units nose-dived as buyers preferred to save 12 per cent GST.  “The projects which were incomplete could not set off earlier taxes like VAT and Service Tax etc. and were not able to give Input Tax Credit (ITC) to the buyers. Thus, the majorly impacted projects were the ones that were incomplete and did not have an OC,” said Mudassir Zaidi Executive Director- North, Knight Frank India, while mentioning issues that compounded the slowdown woes last year. The GST that subsumed as many as 16 taxes and levies right from service tax to VAT, central excise duty, commercial tax to  octroi etc, however, brought little cheer to homebuyers hoping for a price drop. Confusion over the percentage of ITC rebate and how it would be paid, also remained a major pain point for prospective buyers. E Jayashree Kurup, Head Content and Advice, Magicbricks, says, “As  there is no formula to determine the input credit, many developers are telling their customers that the GST input would be refunded to them in the last installment.” “Homebuyers are understandably upset because as of now, their overall payment has increased”, adds Anuj Puri, Chairman, ANAROCK Property Consultants. 

Suggestions

• Uniform 6 per cent GST for all categories of housing.
• Abolition of Stamp Duty.
• Land abatement to be rationalised according to the size of the city.
• Lease premium paid to Development Authorities by developers should be excluded from the purview of GST.  just as it is for the industrial plots.
• More clarity on rules and regulations under the anti-profiteering clause, which was incorporated to pass on the benefits of ITC to end-users, 
• Slum rehabilitation projects projects wherein the units are handed back to the slum dwellers should have restricted GST liability.
• In case of Joint Development Agreements (JDA) there should not be any  GST liability.