Gst A Ray Of Hope For The Realty Sector

The real estate industry plays a noteworthy role in contributing to the economy of the country. Presently, it accounts for about five percent of Indias GDP. The real estate sector in India has witnessed an unparalleled boom in the last few years. However, this manifold growth is coupled with various issues/challenges that are being faced by the real estate business today.

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One such challenge is the management of the multifaceted indirect tax levies such as excise duty, service tax, VAT, stamp duty and registration fees which are applicable on different transactions. In addition to the management of multiple indirect tax levies, the sector faces non-availability of input tax credit which leads to a major cascading tax impact.

The recent history of the real estate industry reveals that the government has taxed the industry rather aggressively hitherto by reducing the exemptions, benefits and concessions available to it, thereby increasing the tax incidence on the business. It is essential that the government simplifies the indirect tax structure and improves the input tax credit mechanism to bring down the cascading impact of indirect tax on the segment.

A ray of hope for the real estate sector will be the advent of the Goods and Service Tax (GST), which may be considered as an effort on the governments part to fulfill the industrys expectation from it. The Finance Minister, in the recent conference on GST, organised by CAG, has expressed his desire to roll out GST from April 1, 2012.

The government intends to simplify the indirect tax structure and improvise the input tax credit mechanism under the proposed GST regime. GST will be applicable at each stage of value addition from the manufacturing stage up to the final consumption stage, and will subsume taxes such as excise duty, service tax, VAT etc, thereby simplifying the complex tax structure.

It is important at this juncture to understand how real GST will be for the real estate sector. Real estate transactions typically involve various activities such as sale of land, transfer of development rights, provision of construction services, sale of commercial or residential property, renting of property etc. GST may appear to be a simplified tax structure, and may hold true for many sectors. However, there are concerns that certain sectors such as infrastructure, oil and gas, and real estate may not end up meeting with enough benefits under GST.

The government needs to consider these issues from the real estate industry perspective before GST is introduced:

Credit for already constructed property

Presently, a large amount of input tax credit is unavailable to the real estate industry and adds to the cost of the business. GST will be applicable at all the stages and input GST incurred in relation to taxable output supplies of goods and services will be available as an offset. It will be unfair if the transitional provisions under the GST Law do not allow the credit of input tax paid under the current regime.

Nevertheless, even if GST permits credit for taxes paid in erstwhile tax regime, the question is what will be the mechanism provided under the GST Law to compute the credit of taxes (such as excise duty, service tax, VAT) paid on a property already in existence.

Stamp duty

It is quite likely that the States may retain authority to levy stamp duty over and above GST. If so be the case, the issue of multiple levies on the same transaction under the present scenario will remain unresolved under GST too.

It is important that the central government takes the necessary steps to subsume stamp duty under GST.

Exclusion of land value

Another question that may arise is whether land is subject to GST. Currently, land is considered immovable property and hence excluded from the taxable value under VAT and service tax laws. The inclusion of the value of land in the taxable value under GST is undecided as of now.

Even if it is assumed that GST will exclude the value of land for arriving at the taxable value, the methodology to be adopted for valuation of land will still remain a debatable issue.

Leasing, renting of property

Applicability of service tax on renting of property has become a matter of debate under the current scenario and is pending before the courts. It is likely that it will be considered as service and made liable to GST. The fate of exemptions available to vacant land, residential accommodation etc under GST regime is ambiguous today.

These are some of the many issues that need deliberation before implementation of GST. There are various other issues such as fate of ongoing works contracts, credit for capital goods used for construction, service tax exemptions to residential units for personal use or building with less than 12 residential units, distinguishing typical real estate transactions from other so-called real estate transactions (infrastructure projects undertaken in public-private partnership where the land is provided by the government), etc that need to be highlighted and well thought-about before introduction of GST.

It is essential that the makers of law consider the practical aspects of real estate transactions while drafting the GST Law and take necessary action so that GST proves a boon for the real estate sector. As a matter of fact, since GST has been deferred by a year, the Finance Minister may also consider addressing certain issues of the real estate sector in the upcoming Budget which will take the government and the industry one step ahead on the road map of GST.

Source: magicbricks.com