If someone looks at the statistics, he is likely to find that the real estate sector is the second largest employer in the country after the IT sector. The real estate contributes about 5 per cent to India’s GDP. Like many other sectors, the real estate sector is also plagued by a variety of taxes. In fact, it is so complex that the buyer’s calculations for the loan amount can fail easily if he does not study and analyse each and every indirect tax aspect.
Multiple tax incidences to go: The seller and buyer normally agree on a basic price for the real estate. The loan amount considerations are based on the basic sum. When the buyer is making the payments in instalments or lump sum, a plethora of indirect taxes come into play like the service tax, stamp duty, registration charges, VAT and excise duty. The GST is going to subsume all these taxes and there will be a single tax rate payable by the buyer.
Ambiguities as per Model Law: The clause 5 as per schedule II indicates that any building or civil infrastructure that is under construction in full or part with an intention to go ahead with a sale to a buyer shall be considered as a “service” supply. There are exclusions to this legislation if the total proceeds are received after the completion certificate is issued or before the building is occupied, whichever is earlier. Let us look at how this clause will result in higher tax outgo from the buyer.
Higher rate: Though there is no capping of the tax rate in the constitutional amendment, but the opposition Congress is trying to limit the GST rate at 18 per cent. The ruling party has agreed to the demand of the opposition and is making every effort to keep the GST rate in the 17-19 per cent slab. The buyer will thus find an increase over the existing service tax rate.
Input credit loss: The developers and builders in the real estate sector pay CST, excise duty, Octroi and customs duty on the material purchase. All this is passed on to the buyer. The final tax rate which the buyer unknowingly pays is around 22-24 per cent. With the GST, it is likely that the tax would be around 18 per cent provided the developer can claim the input tax credit which seems difficult. This is because the real estate developer sells his inventory
- While developing the project and
- After completion of construction.
The catch lies in the fact that the input goods and services are availed for the whole project right from the beginning and cannot be classified. This results in a situation where segregation of input credit is not feasible. Hence, higher taxation is passed on the customer due to input credit loss even in the GST regime.
Input credit restriction: Section 16(9) of the Model Law nullifies the availability of the input tax credit when the principal acquires the goods and services while carrying out the execution of the works contract. The point to be noted here is that the output of the contract results in the construction of immovable property which is different than plant and machinery.
Actual GDP growth not clear: The opinion of the experts is divided over the extent of the GDP growth, but they agree that it will happen over the period of 1-2 years. This is a long period and with the current set of ambiguities and restrictions on credit, the GST may not augur well for the real estate sector.