Real Estate Staring At Thorns Dipped In Honey by Rajat Mohan and Dhirendra Kumar
Real Estate Staring At Thorns Dipped In Honey by Rajat Mohan, Partner, AMRG & Associates, with special inputs from Dhirendra Kumar, Manager – GST, AMRG & Associates
The GST Council, in its 33rd meeting held on 24 Feb 2019, made following recommendations for the real estate sector:
|Residential Segment Type||Existing Effective GST Rate||New Effective GST Rate to be levied|
|Residential properties outside affordable segment||12% with ITC||5%, without ITC|
|Affordable housing properties||8% with ITC||1%, without ITC|
The above-mentioned recommendations would be brought into effect from April 1st, 2019 and suitable notifications would be issued to give effect to the same. It appears that said reduction in tax rates proposed with a view to addressing the slowdown in the industry and low off-take of under-construction houses specifically targeting residential property to boost the residential segment. Whilst reduction in rates is a welcome relief to the industry. Let us evaluate the issues that may emanate for the industry on account of the massive tax reductions proposed in the sector:
Relaxations as above are planned only to accommodate residential property, whereas practically speaking every residential colony is backed by some commercial shops including groceries, gyms, eateries etc. so as to support a comfortable living. Now the issue would be charging of multiple tax rates in a single project, together with complexities of vivisecting credit for every receipt of goods or services. In such a situation accounting and filing of compliance returns would be a regular nightmare.
Completion of an infrastructure project usually takes 3- 5 years. Thereby many of the under contrition flats would have been under construction since Pre-GST regime. The sector as a whole would be undergoing a major change in tax structure for the second time in the last two years. Such frequent changes in tax structure push the sector in a re-boot mood compelling the industry to adjust modulate equilibrium prices yet again. This would add to the business risk profile of the players, in fact, many of the small payers would not be able to adjust themselves to the transitionary phase and may even collapse in eventuality.
Real Estate sector is expected to witness a hard time in computing and implementing a pricing policy whereby they are able to safeguard themselves from the provision of Anti-profiteering. In case the operation of Anti-profiteering is extended beyond the current term (June 2019) then players should be ready with a proper justification of pricing policy backed with documentary evidence. The ideology of GST (i.e. continuous chain of GST credit) shall not be achieved as the chain of GST credit will be broken with the denial of rebate for the taxes already paid on raw materials leading to padding up of cost and resulting in an increase in the price of the final product. Procurements like Steel, Cement, Contractors charges etc. are taxed between 18% to 28%, for which the builder would not be able to claim the tax credit, resulting in higher costs for the supplier without much scope to increase prices.
The real-estate sector is a capital intensive sector which requires a big moolah for all the consumers. Due to its sheer nature, real estate industry has numerous permutation and combinations of the payment schedule, extensions, delays, advance receipts, partial payments, builder initiated defaults, buyer related payment defaults, etc. In such background, it is almost impossible to move from a scheme of “full tax credit” to scheme of “no tax credit” without major inconvenience for the industry. Framing of crystal clear laws for all situations is tough and keeping a check on each payer by the tax authority is impossible, which will add to the complexities of the trade. Majority of the payers have accumulated high tax credit in the electronic cash ledgers since July 2017 on account of transitional credit and high rate of tax on procurements including Cement, steel etc. With this new law in place, the accumulated tax credit would expectedly lapse on March 2019, resulting in a disbalance for the players who took the entire tax credit as a recoverable asset in books.
Intermediate tax on development right, such as TDR, JDA, lease (premium), FSI is proposed to be exempted only for such residential property on which GST is payable. Extending an exemption from a future date signifies that all such transactions were liable to tax before such an explicit exemption is placed. This proposal adds another controversy which would be used by tax officer against the real-estate players forcing them to pay tax on tax neutral transactions completed in the past era. The government needs to reassess the situation for not pushing similar law of exempting Intermediate tax in case of commercial properties.
Unarguably numerous reforms including RERA and MSME has been pushed in real estate sector loading the players with higher compliance coupled with heavy penalties. Similar benefit has again been pushed across the sector, which is substantially lowering the taxes in residential under-construction markets upping the overall morale of the citizens in the country. However, this reform is expected to again load the real estate players with more compliances adding to the tax risk profile of each one. Businesses are expected to keep an eye on the proposed transition rules expected on account of the new tax rates in the sector.
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