GST Council on Real Estate Sector By Rajat Mohan Partner AMRG & Associates

GST Council on Real Estate Sector By Rajat Mohan Partner AMRG & Associates

Taxation of this sector was loaded with multiple taxes including Value Added Tax (VAT), Service Tax, Stamp Duties etc. There is no uniformity in taxation, as real estate was being subject to tax by State Governments, tax rates of which varies state to state.

Average taxes on a residential property in Pre-GST regime

TaxBengaluruMumbaiPuneChennaiGurugram
VAT4.0%1.0%1.0%2.0%4.0%
Service Tax4.5%4.5%4.5%4.5%4.5%
Stamp Duty5.7%5.0%5.0%7.0%6.0%
Registration Charges1.0%1.0%1.0%1.0%0.5%
Total Taxes15.2%11.5%11.5%14.5%15.0%

Source: Internet search

The burdensome compliance and denial of credit made it extremely difficult for builders and developers to comply with tax laws. AT that time it was thought that GST would a boon for the struggling industry.

GST Council on Real Estate Sector By Rajat Mohan Partner AMRG & Associates
Rajat Mohan Partner AMRG & Associates

Present taxation Scenario for Real estate under Goods and Services Tax

Paragraph 5(b) of schedule II of CGST Act, 2017 states that: The following shall be treated as supply of services being “Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier”.

Above reproduced paragraph in simple words says that “if entire sale consideration of a property is received after issuance of completion certificate or its first occupation” then it would be free from GST. However if any amount let’s say even 1% of total consideration, is received before the completion certificate or occupation then GST will be levied on the entire consideration.

Currently residential properties sold before getting the completion certificate are liable to 18% rate of GST, however a one-third of 18% is given as abatement for the value towards land hence effective rate of GST is 12% on residential properties.commercial properties with the facility of input tax credit. Effective rate of GST on affordable housing is 8% with the facility of Input Tax credit.

Expectations under GST

Rationalization of tax rates one of the biggest expectation of this sector from day of GST implementation. Any reducation of tax rates in reality sector would not only boost the sales for the real estate sector but would also allow the benefits to reach the ultimate consumers. However any restriction on input tax credit would result in massive cascading effect of taxes and lowering the profits of the industry. In an interview to ANI, Hon’ble Prime Minister Mr. Narendra Modi said that his government wants to impose a 5 percent GST on all classes of residential properties, completed or under construction. If this is done then it will be game changer for the Real Estate Sector as it will have far-reaching impacts and it s expected by many experts that it may revive the stressed Real Estate Sector.

GST Council Stand and Way Forward

Home buyers and Developers were expecting few things first being cuts in applicable GST rates on properties and secondly comprehensive inclusion of Real Estate sector in GST regime, when the 32nd meeting of GST Council was scheduled to take place on January 10th-2019.

After the Meeting Finance Minister Mr. Arun Jaitley while briefing the media on the decisions taken at the meeting informed on the development for rate cuts in real estate sector that there were diverse opinions in council on the matter and a 7 members group of minister will be formed. And that GoM will give its recommendations on this matter which will be considered in next meeting.

Formation of GOM and their term of reference

On 15th January, a 7 member’s ministerial group was formed; to study the problems faced by Real Estate Sector currently and for the following matters;

  1. Analyze tax rate of GST;
  2. Providing a Composition Scheme for Residential Construction Units,;
  3. Examine various aspect of levy of GST on Transfer of Development Rights (TDR) and Development Rights in a joint Development Agreement and suitable model;
  4. Examine legality of inclusion/exclusion of land or any other ingredient, in Composition and suggest Valuation Mechanism.

This group would required to understand the needs of home-buyers, demands of builders and economic environment. It is expected that group would also acknowledge that many builders are not passing on the benefit of input tax credit to the consumers.

Anti-profiteering

Primary advantage of GST, being full credit on taxes on all procurements of inputs by the builders hasn’t fully reached the consumers. Anti-profiteering provisions under GST laws were not successful in checking the price enhancement by builder in the post-GST regime. This forced the government to contemplate a composition scheme without the facility to avail input tax credit, as it will ensure correct pricing policies by the sector as a whole. However, this step is expected to put to hole in the pocket of debt-ridden and financially struggling players.

To summarise:

In India, Real Estate sector has come a long way over the past few years, due to continuously growing income levels of middle class. However this sector still suffers with a lot of problems one of them being complexity of Taxation Structure. In recent times this sector has shown slowdown or shown extremely sluggish growth, due to unfavorable rates of taxes and high rates of interest on home loans.  Industry and home buyers were expecting some rationalization of tax rates in new year, but that didn’t happen in GST Council meeting. However as GoM is formed it can be expected that tax concessions for the Real Estate sector would be unveiled in next few months.

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