Above: The real estate sector is expected to grow fast in the coming years, and the GST relief will give it a boost/Photo: Anil Shakya
The realty sector has been clamouring for relief. This may fructify as the centre has said that it wants to bring under-construction and finished houses under the GST rate of five percent
By Sumit Dutt Majumder
The gloom over the real estate sector is on the wane. The Council is expected to give further relief to the housing sector in a meeting by this month-end. But first, let us understand some basic facts about indirect taxation on real estate. Real estate consists of land, land improvements, buildings and building improvements. It is a tangible asset. In contrast, “real property” is intangible and represents individual legal rights associated with ownership of real estate. Services associated with real property include construction and renovations. In principle, there is no reason to treat durable consumption goods such as housing differently from non-durable consumption goods or services. In practice, however, the appropriate and equitable treatment of housing and housing services remains one of the more difficult areas in GST. Economists, therefore, suggest that developing and transitional countries should have strong financial administration to stand up to the challenge of bringing real property within the ambit of GST and this may be step by step.
The real estate industry plays a significant role in the development of India’s infrastructure base. It is closely dependent on industries such as cement, steel, paints, tiles, fixtures, etc. This sector is expected to grow faster in the coming years for reasons such as high urbanisation, shortage of affordable housing, development of smart cities and industrial corridors.
The pre-GST indirect tax treatment of the real estate sector was complicated with multiple levies like central excise on input goods, service tax on taxable services such as construction, rentals, CST and octroi for interstate trade of inputs, state VAT on building materials and stamp duty by states on registration of sale of immovable property. Credit was not available for these taxes, which become non-creditable tax costs to the developer on his procurement side. This, in turn, got in-built into the price of flats. Besides, there were quite a few unresolved issues like overlapping of two primary levies—service tax and state VAT, transfer of development rights in land, and so on.
The introduction of GST started resolving most of the aforesaid tax issues. The replacement of multiple taxes by GST was to facilitate seamless credit and cut down compliance cost and thus bring down the price of building materials and their transportation. Therefore, construction cost in the hands of the developer was to get reduced. But the government soon realised that the benefit of the input tax credit was not being passed on by many builders to homebuyers. Therefore, through an advertisement on July 28, 2017, the government cautioned that if these benefits were not passed on to homebuyers (reflecting in reduced cost), the same could be deemed to be “profiteering” under GST laws.
As for constitutional provisions, the structure of GST as provided in the 101st Constitution Amendment Act, 2016, does not envisage bringing the entire real estate sector within the ambit of GST. For example, an important activity such as immovable property transactions, i.e. transfer by way of sale of immovable property after completion, continues to be outside GST. Thus, stamp duty on the sale of immovable property is outside GST and it continues to be levied by the state.
Finally, GST treatment of real estate has emerged as follows. Construction of a flat, house or complex intended for sale is a “supply of services” according to Schedule II of the CGST Act, and hence taxable. However, if the entire consideration towards the flat/house is received after receipt of the completion/occupation certificate or after its first occupation, whichever is earlier, then such activity would not be “supply” as per Schedule III of the aforesaid Act. Further, in terms of the same Schedule, no GST is applicable on “ready to move in” property or completed property or any property under-construction in respect of which this certificate was issued before the commencement of the GST Act on July 1, 2017.
A transaction involving sale of such immovable property after initial occupation or after receipt of occupancy certificate does not attract GST. As per GST laws, “land” is an immovable property and is not deemed either as goods or services. Hence, the sale of land does not attract GST. Besides, as the supply of services in relation to the construction of a flat/house also involves transfer of “land” which does not attract GST, the value of supply in respect of such land will be deemed to be one-third of the total amount charged for such supply. Therefore, GST will be charged for such supply on two-thirds of the consideration.
Further, builders, developers, etc, are entitled to avail of credit on input goods such as cement, steel, cables, etc, and input services such as architectural services, designing, drawing, manpower supply, and the like. By exclusion of land value and allowing input tax credit, there was to be a sobering effect on the final tax incidence on the builder. Credit will, however, not be available for construction of an immovable property on his own account. But credit will be available on inputs used to manufacture plant and machinery for own use. Thus, if a company constructs an office building for its headquarters, credit will not be available. But if it constructs a blast furnace to manufacture steel, credit will be available as it’s a plant.
As for GST rates on under-construction flats, houses, etc, the standard rate is 18 percent with abatement for land value, which effectively pegs the GST rate at 12 percent; the builder is also allowed to avail of credit.
The renting of residential property is exempt from GST, while that of commercial properties is not. Resident Welfare Associations (RWA) will have to pay GST on monthly subscription or contribution charged from its members if such payment is more than Rs 5,000 per member and the annual turnover of the RWA by way of supply of services and goods to its members is more than Rs 20 lakh (to be increased to Rs 40 lakh from April 1, 2019). The GST rate is 18 percent with facility of credit for input goods and services.
The real estate industry has been struggling for the past five years or so. To add to its woes, the 2016 demonetisation hit it hard and a sudden slowdown in construction activities all across the country was quite visible. Some eight months after demonetisation, the introduction of GST with 18 percent tax, which was higher than the combined pre-GST taxes on construction activities, affected the real estate sector adversely. Construction activities are labour-intensive and generate employment on a large scale. Therefore, a marked slowdown in construction activities led to largescale unemployment. Although a few weeks after the introduction of GST, the government put out an advertisement asserting that GST would be beneficial to trade and industry, ground realities were different.
Right from the beginning of the introduction of GST, the real estate industry has been clamouring for relief. Realising the gravity of the situation, the prime minister in an interview on January 1, 2019, indicated that the government wanted to bring under-construction and finished houses under the GST rate slab of five percent, and that the matter was under the active consideration of the GST Council. Having failed to reach a consensus on what the prime minister had indicated, the Council in its meeting on January 10, 2019, set up a Group of Ministers (GOM) to examine GST rate issues of the real estate sector. The seven-member GOM headed by Nitin Patel, Gujarat deputy chief minister, has reportedly finalised the report which will be submitted before the GST Council. As dates for the general election are expected to be announced in early March, there is an urgency to sort this out.
The real estate industry has asked for a suitably lower GST rate with the benefit of input tax credit. But ministers in the panel asserted that there were many complaints from homebuyers that the credit benefit had not been passed on to them by the builders. The panel, therefore, favours lower GST rate without the benefit of credit. In fact, the panel favours two lower rates—five percent for all under-construction houses and a special rate of three percent for under-construction “affordable houses”—both without availment of credit. This was divulged in a media interaction by Patel. He hopes these measures will give a boost to the housing industry and lead to more revenue generation for both the centre and states. There is no doubt that lower GST rates will boost the construction industry. But from a structural standpoint, the problem will be that the GST credit chain will be broken, and there now will be another duty slab of three percent in addition to the existing four slabs—five, 12, 18 and 28 percent.
No doubt, the real estate industry is under stress and minimising the tax cost will give a fillip to it. The point to be seen now is whether the cumulative impact of tax cost on account of denial of credit for GST in the lower slab of five percent is lower than that of GST in the 12 percent slab with the benefit of credit. One will have to wait to see the final print of the GOM recommendations.
—The writer is former chairman, CBEC, and author of “GST Explained for Common Man”