No GST On Competed Projects,
Finance Ministry Clarifies
Finance Ministry Clarifies
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Clarifying that units that have received a completion certificate do not attract any GST (goods and services tax), the finance ministry on December 8 asked real estate developers to pass on the benefits they get in the form of input tax credit to homebuyers.
"It is brought to the notice of buyers of constructed property that there is no GST on sale of complex/ building and ready to move in flats where sale takes place after issue of completion certificate by the competent authority," the ministry said in a statement.
"Builders are also required to pass on the benefits of lower tax burden to the buyers of property by way of reduced prices/ installments, where effective tax rate has been down,” the statement further read.
"Builders are also required to pass on the benefits of lower tax burden to the buyers of property by way of reduced prices/ installments, where effective tax rate has been down,” the statement further read.
In fact, the anti-profiteering body ordered Gurgaon-based developer Pyramid Infratech to compensate over Rs 8.22 crore to 2,476 flat owners, who had invested in the company’s two affordable housing projects, for not passing on the GST benefit. The builder was also served a show-cause notice by the watchdog, asking it why a penalty not be imposed on him. This was the first instance of a developer attracting a penalty for not passing on GST benefits.
Passing its order on 36 applications filed by 102 homebuyers, the National Anti-Profiteering Authority (NAPA) on September 18 said the builder was liable to pass on the benefit made under the new tax regime’s input tax credit (ITC) system, and it was not that the builder was paying anything from his own pocket. The watchdog gave the company three-month’s time to comply with its order and also directed the Haryana tax commissioner to ensure its order is carried out, and submit a report accordingly.
While the rate of tax for under-construction projects under the GST, which came into effect in July last year, is set at 12 per cent through work contracts, the applicable rate on affordable housing segment is eight per cent. On the other hand, joint development agreements, under which landowners and developers together build a project, are taxed at 18 per cent. The real estate sector does not directly fall under the ambit of the GST.
"The respondent (builder) cannot appropriate this (ITC) benefit as this is a concession given by the government from its own tax revenue to reduce the prices being charged by the builders from the vulnerable section of society which cannot afford high-value apartments,” the NAPA order read.
The two housing projects, Urban Homes in Sector 70A and Urban Homes in Sector 86, were launched by the builder under the Haryana Affordable Housing Policy, 2013.
“The respondent is not being asked to extend this benefit out of his own account, and he is only liable to pass on the benefit of ITC to which he has become entitled by virtue of the grant of ITC on the construction service by the government," the watchdog further said.
Work in progress
With an aim to push demand, the government had decided to lower the applicable GST rate for home purchases under the Credit-Linked Subsidy Scheme (CLSS) of the Pradhan Mantri Awas Yojana (PMAY) to eight per cent in January this year. In a meeting held on January 18, the GST Council had to extend the concessional rate of GST on houses constructed/acquired under the CLSS for the economically weaker section (EWS), the lower-income group, the middle-income group-I (MIG-I) and the middle-income group-II (MIG-II). This concession has also been extended to apartments up to 60-square metre carpet area.
After that meeting, Finance Minister Arun Jaitley also announced that the council might consider bringing real estate under the purview of the new tax regime. Earlier also, Jaitley had made a strong case for bringing real estate under the purview of the GST.
"The one sector in India where the maximum amount of tax evasion and cash generation takes place is real estate and which is still outside the GST. Some of the states have been pressing for it. I personally believe that there is a strong case to bring real estate into the GST," Jaitley had said while talking about India's tax reforms at the Harvard University last year. Bringing real estate under the ambit of GST would result in consumers paying one final tax on the property, the FM said.
So far, the option of getting full input set-off credit that developers enjoy on under-construction projects is not applicable on ready-to-move-in flats. When that changes, it would effectively mean higher costs for homebuyers of ready-to-move-in flats, say developers.
"In the current arrangement, while developers might still get some benefits for projects that are in nascent stages, they will have to bear the tax burden for the ready-to-move-in projects since they are kept out of the GST ambit," an earlier PTI report quoted Hiranandani Group Chairman and Managing Director Surendra Hiranandani as saying.
Good news for landlords, too
Those who are earning a rental income by letting out their properties for residential use will not be taxed under the GST. However, those who have given their premises on rent to be used for commercial or industrial purposes will have to pay an 18 per cent tax in case they are earning over Rs 20 lakh annually.
"Rental income received from a residential house is exempt. But, if you have given your unit to commercial enterprise, it is taxable if you are getting more than Rs 20 lakh as rent," said Revenue Secretary Hasmukh Adhia.
GST in India
The Rajya Sabha had on August 3 and the Lok Sabha on August 8 unanimously approved the Bill to enable the rollout of GST, arguably the biggest tax reform in India in recent times. The approvals have paved the way for implementing the indirect tax regime within the Union government's revised deadline of April 1, 2017.
The Goods and Services Tax (GST) Council on November 3 set the rates for the new tax regime. These rates would range from 5 to 28 percent, with 12 percent and 18 percent as standard rates. While things of mass consumption would be taxed at the rate of five per cent, luxury would be taxed at 28 percent.
Finance Minister Arun Jaitley had on August 3 tabled the Goods & Services Tax (GST) Constitutional Amendment Bill in the Rajya Sabha, and initiated a five-hour debate on the landmark tax reform. The proposed indirect tax regime, which is likely to subsume 17 indirect taxes upon implementation, will remove the disparity in the taxation structure across the country and bring one uniform tax rate.
How will GST impact real estate?
The real estate sector is estimated to account for about five per cent of India's gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from 2015.
However, the sector faces issues in terms of macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multiple indirect tax levies, such as VAT, service tax, excise, stamp duty and registration fees.
With the launch of GST 'how it works' might already be on your mind. Since the GST is to subsume multiple indirect taxes, it will simplify tax compliance and minimise the scope for double taxation. So, there is clear reason for home buyers to cheer, even if they have to pay slightly more in case the standard GST rate is high.
On how GST will impact the real estate sector, Ankur Dhawan, Chief Business Officer (Resale), PropTiger.com, says: "GST itself is expected to add about two per cent to India's gross domestic product (GDP). That is a substantial boost to the economy. If the economy does well, obviously, there will be more demand for real estate, and it will be a boost for the sector."
Why a slightly higher GST rate might be acceptable to buyers
Since buyers are not liable to pay any indirect tax for the purchase of ready-to-move-in properties, the impact of GST on buyers of resale properties is likely to be very little. In the case of under-construction property transactions, buyers have to pay value-added tax (VAT) and service tax. While VAT is a state levy and its rate differs from one state to another, service tax is a central tax charged at 15 per cent. Overall, the current taxes on home purchase are not low and involve mind-boggling complexities.
Most buyers of under-construction properties take home loans to fund their purchase and the whole mathematics involved in the home loan process is quite baffling, too. In most cases, buyers do not carry out a detailed study of the various taxes that they have to additionally pay and they make their investment plans based only on the value of the property.
In the case of VAT, for example, there is little clarity on what amount is paid at which level, and what part of it is passed on by the developer to the buyer. Often, for want of more clarity on the VAT rate in his state – if at all the state is imposing VAT on real estate – a buyer has to rely on the clauses mentioned in his sale agreement with the developer.
Unfortunately, no amount of research helps the buyer know the right rate? Lengthy government documents are mostly interpretative in nature and if you are not a professional chartered accountant, you might get lost in the study, and yet get a little success. On the other hand, if there is a clear uniform rate for one tax that includes everything that they need to pay in taxes to authorities, the whole payment process would become very convenient for the buyer. In such a case, even a higher rate would be more acceptable to him than a lack of clarity.
Why will developers love GST?
Since the GST is actually expected to bring down the project cost for developers, this would mean homes would, in fact, become cheaper.
There are many taxes and duties that a developer pays on the procurement side, such as Customs duty, Central Sales Tax, excise duty, entry tax, etc. These are subsequently passed on to the final pricing of the units and, thereby, to the buyer. As GST proposes to roll multiple taxes into one, the cost of construction will come down. This will bring more liquidity into the market and boost home sales. Free flow of credit for developers will also translate into an increase in margin in their hands.
"There are a lot of products developers procure for construction of their projects on which there is double taxation at present. The cost they bear for these come to 20 to 25 per cent of the cost of materials they are buying. So, with the GST rate, between 12 and 18 per cent, it will reduce the cost of production for developers. This will be good for buyers, as developers will be able to pass a part of the benefit to them," Dhawan adds.
For developers, the actual tax effect will be lower than the existing one mainly due to the input tax credit on raw materials that developers get against payment of taxes on inputs like steel and cement.
Moreover, the increase in tax is very less for major inputs. The indirect taxes on steel were around 17 per cent and that has now come to 18 per cent under GST, similarly, for cement the taxes totalled to nearly 24 per cent which now has been standardised at 28 per cent. The GST rate for work contracts has also been fixed at 12 per cent.
"There is no doubt that GST will be a game-changer for Indian industry, including for the real estate sector, since it will subsume more than 16 major taxes and levies into a single consolidated tax. Additionally, the unified tax regime will stop the unwanted practice of double taxation, which hurt real estate and other sectors, given their cascading effect that inflated prices for end users. Though unorganised players are wary of GST's impact, it will create a level playing field for organised entities; the former will now come within the tax ambit. With GST enforcing transparent transactions across all domains, this will be a blessing in disguise for real estate developers, too," says Aman Agarwal, director, KV Developers, and a member of the Naredco governing council.
Through market mechanism, GST will impart more transparency to the sector, which faces a perception issue. GST would provide an audit trail for better control and monitoring of the sector.
- by Sunita Mishra
(With inputs from Srinibas Rout)
Source : PropTiger