GUEST COLUMN
GST and Real Estate – How will industry react?
By
CA Pratik Shah - Partner, SKP Business Consulting LLP
Priyanka Naik - Sr. Manager, SKP Business Consulting LLP
With the passage of Real Estate (Regulation and Development) Bill, 2016 and the growing need for commercial and residential properties, it is expected that the real estate sector may witness a considerable growth in the future. The bill has been passed with a measure to bring in increased transparency in the sector and protect customer interest. It has removed all restrictions on FDI into real estate and construction sector, with an intention to have a major boost to the cash-starved sector. Further the law makes it mandatory for developers to post all information related to its projects open for consumers review and park 70% of the projected funds in a dedicated bank account to ensure that developers are not able to invest in numerous new projects with the proceeds of the booking money for one project, thus delaying completion and handover to consumers.
The sector has sailed through rough waters in the past; facing controversies related to levy of Indirect taxes on construction activity. Though the controversy whether VAT should be levied or not on construction activity was put to rest by the judgement of Supreme Court in the case of Larsen and Toubro 2013-VIL-03-SC-LB; however there are certain issues which still continue to prevail; a few of which are as under:
1) Multiple levies of taxes on sale of flats – VAT, Service Tax, Stamp duty etc. is levied on value of property. Apart from that registration charges and transfer charges are applicable on registration and transfer of property respectively. Stamp duty is payable on agreement value or market value, whichever is higher; accordingly the buyer finally ends up paying tax on higher value; in case where market value is more than agreement value.
2) Restriction on availment of CENVAT Credit - Excise duty and VAT paid on purchase of inputs and capital goods i.e. in case where the developer opts to claim abatement under service tax, then credit of excise duty paid on inputs is not available. Further in case where the dealer opts for composition scheme or abatement on a standard rate under VAT, than credit of VAT paid would be available however the same would be restricted as per the rules framed under respective state law. Further, Service tax credit is available to the developer subject to certain conditions.
3) Divergent state laws for valuation- In case where a dealer has projects in different states then the dealer is required to have knowledge of each such state VAT law, for the purpose of discharging VAT; leading to different VAT rates, method of valuation etc.
4) Dual levy of VAT and service tax on a certain value of property - Typically VAT should be levied only on the value of goods sold and service tax on value of service provided; however in case where the dealer opts to pay tax under composition scheme, then service tax is to be paid on 30% of the contract value and VAT at 1% on the entire contract value (Scheme available in the State of Maharashtra).
5) Non availability of Credit to buyer using the property for commercial purpose - Currently even buyers purchasing the property for commercial purpose are not allowed to claim credit of VAT and service tax paid on property purchased, thereby adding to the cost of the property.
6) Taxation of Transferable Development Rights (TDR) - The land owner transfers development rights in the land to the developer in lieu of developer providing fixed quantity of flats to the land owner or share in the revenue from sale of flats. The value of TDR and tax on transfer of the same is currently under dispute.
It is expected that the above issues may be resolved under GST thereby reducing the overall cost of property and making it within the reach of a common man. Any change in the real estate sector would indirectly have a major impact on the growth of business in India, accordingly it would important to analyse the impact of GST on construction sector and understand what Model GST law mentions about real estate.
Impact of GST on Real estate sector (basis the Model GST law, 2016 dated 14 June 2016)
As per Schedule II (Matters to be treated as supply of goods or service) of the Model GST law, construction activity is deemed to be a supply of service. Accordingly deeming fiction is created basis which all construction activity is treated as supply of service and the provisions as applicable to supply of service would be applicable. By creating a deeming fiction ambiguity prevailing under the current provisions with regard to classification of contracts should no longer exist under GST. Also existing litigation is expected to reduce under GST because of single tax regime.
A developer may currently pay service tax on actual value of service provided or claim abatement and pay tax on 30% of the total contract value. In such a scenario, the developer may be eligible to claim entire CENVAT Credit on only input services used for provision of construction services.
Similarly VAT may be paid on actual value of goods sold or pay tax at reduced rate as per composition scheme available under respective state VAT laws. In such a scenario, the developer may be eligible to claim entire credit in case of tax paid subject to restriction prescribed under respective state VAT laws.
However as per the Model GST law, it appears that credit of tax paid on inputs and input services may not be available under GST; as the same is specifically excluded for availment. Non availment of credit of tax paid on inputs, capital goods and input service would be a huge set back for the real estate sector as the same would be added to the overall cost, thereby increasing the total value of property sold. It is expected that availment of credit would be clarified in the final GST law.
Each state has multiple valuation mechanism (i.e. ascertaining the actual value of goods transferred during the execution of works contract and provision of service, composition scheme, standard deduction, abatement etc.) for ascertaining the value of property sold and payment of VAT and service tax.
It is expected that the need for valuing the contract for the purpose of service tax and VAT using various alternative mechanisms such as abatement and composition could be negated under GST; as a single tax will be levied under GST on entire contract value. Further the valuation rules specified under the Model GST law are currently silent on valuation mechanism to be followed by construction sector for levy of GST.
However levy of GST on sale of immoveable property i.e. land along with the constructed property is still a question. As per the information available in the public domain it is understood that stamp duty would not be subsumed under GST and would continue to be levied as that under the current legislation as per entry 63 of Article 246 of the Constitution of India. As per the tax laws prevailing in Australia and Singapore, GST is levied on transfer of land despite the same being offered to a land transfer tax, however the same is exempt from GST in United Kingdom. It would be interesting to see which tax treatment the Indian Government will adopt.
Further the definition of service under GST includes actionable claim and supply of same with or without consideration. In case where the developer receives Transferable Development Rights (TDR) for undertaking additional construction in lieu of flats in the newly constructed property, the said transaction may fall under the ambit of supply of actionable claim without any monetary consideration and be leviable to tax under GST; however valuation of the same would be under limbo.
GST can be said to be an old wine in a new bottle. Supply of goods and service currently liable to VAT, CST and service tax would continue to be taxed under GST legislation as well; however the same the taxes are replaced with CGST, SGST and IGST.
Currently a dealer needs to file VAT and CST return as per the respective state legislation and a service provider needs to file half yearly service tax return under the service tax law. However as per the Model GST law, under GST a dealer needs to file 3 returns every month and one annual return, totalling to 37 returns per year per registration.
Further in case if the dealer is liable to deduct TDS and is also registered as an Input Service Distributor (ISD) for distribution of credit then the as per the Model GST law, the dealer is required to file 2 returns each month (one for TDS and other for ISD); thereby increasing the total number of returns to 61 returns per registration per year.
In case if the dealer has its presence in more then one state, then the number of returns would increase manifold depending upon number of registrations obtained under GST.
1. Clarity on availment of credit to buyers on using property for furtherance of their business
2. GST on sale of land along with property
3. Currently construction contract is treated as ‘Works Contract’ under the State VAT laws and WCT TDS is deducted on payments made to contractor and sub contractor, however levy of WCT TDS under GST is not yet clear
4. Impact on long term contracts once GST is introduced
5. Taxability on agreement between contractor and sub-contractor for construction of property; whether exemption is available to sub-contractor
As real estate plays a pivotal role in the development of the country, liberal tax laws and fungibility of credits would lead the industry to flourish. Accordingly, industry should represent and seek clarity on the Model GST law on areas pertaining to credit of GST on procurement of goods/services, whether land cost should be excluded for levy of GST, applicability of TDS, exemption from GST to sub-contractors, levy of GST on TDR, etc.
Disclaimer: Views expressed are strictly personal. The content of this document are solely for informational purpose, it doesn’t constitute professional advice or recommendation.