The Goods and Services Tax (GST) Bill, one of the most ambitious tax reforms in India is finally passed by the Rajya Sabha on August 3, 2016 and is expected to be implemented from April 1, 2017.
What is GST?
The Goods and Services Tax (GST), is a kind of a comprehensive indirect tax on sale, manufacture and consumption of different kinds of goods and services throughout India, with all other Central and State taxes intended to be subsumed under it.
Why GST is important?
GST subsumes all indirect taxes levied by the Centre and the states, including excise duty, service tax, value-added tax, luxury tax and entertainment tax. It will remove all barriers across states and make the country a common market. It is expected to add up to 2% to the gross domestic product, once implemented successfully.
Existing Taxation Norms
The real estate industry in India has witnessed major tax changes, in the last few years. However, these taxes are not uniform all over the country – different practices and regulations are followed in different states. It was the 46th amendment to the constitution that brought massive changes towards taxation in the real estate sector. Subsequently, special powers were given to the state governments, for implementing Value-Added Tax (VAT) on some specific kinds of transactions.
For land, property and other kinds of work contracts, different kinds of taxes are levied by the state government and the central government. The transactions are mainly categorised in three parts – value of services, value of goods and materials, and value of land. VAT is applied by the state government on the goods portion, while value of services is taxed by the central government. However, other than stamp duty, there is no clear tax on the transactions regarding value of land. This situation leads to confusion and can result in dual taxation. Compliance and implementation of such taxes are also difficult.
This has led to a situation, where for one real estate transaction, multiple taxes need to be paid. This has a negative effect on the industry.
The industry’s demand to bring GST on board, is primarily to get a clear and transparent taxation rule for the real estate sector in India.
Impact of GST on Indian Real Estate Industry
The implementation of GST can prove to be a significant step in reforming indirect taxation in India. Chances of double taxation would be diminished, as some of the Central and State Government taxes will be amalgamated into one tax. This will ease the process of taxation considerably, making its enforcement and administration easier and simpler.
In the current situation, a developer incurs various kinds of expenses during the construction phase of a project. Different kinds of taxes are involved with these expenses, such as VAT/CST, customs duties, service tax, excise duty, etc. A majority of these taxes, are expenses that are included in the system. This is because they are not creditable to the developer or to the end-customer. These non-creditable expenses lead to tax inefficiency, which is not desirable.
One positive impact of the GST, could be the doing away of restrictions on credit utilisation. This will definitely help in strengthening the credit chain in the entire system. If builders can properly manage this aspect, they will see some profit.
Expert Views on GST Bill
Anshuman Magazine, Chairman, CBRE – India and South East Asia
“The GST Bill has been long awaited by the industry. This is a major tax reform for our economy, which will transform India into a single market. The passage of this Bill is likely to positively impact the real estate sector, which has linkages with over 250 ancillary industries. Unified taxation will also infuse the much needed transparency into our taxation system. Overall, the Bill is expected to have a long lasting and progressive impact on the economy, enhancing the prevalent business sentiment in the country.”
Ankur Dhawan, Chief Buisness Officer, PropTiger.com
“With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost for them and can be passed as reduction to buyers. For commercial property, GST will reduce taxation as developers will be able to get input credit of GST paid for construction services against the GST charged on lease rentals. In the long run if GST can help increase GDP by 2% as predicted by experts it will in turn drive the demand for real estate hence helping real estate industry.”
Parveen Jain, President, NAREDCO
“The enactment of this law will single-handedly solve many of the challenges faced by the real estate sector and help in pulling the sluggish sector out of its long slumber. Heavy taxes that are being paid currently by the developers will automatically go down by a considerable percentage. Construction costs would be reduced to some extent and this benefit could be passed on to the customers, thereby triggering transactions in home buying. There would also be a positive impact on the commercial property segment, as commercial real estate which is already starving from funds could see some kind of a revival.”
Vineet Relia, Managing Director, SARE Homes
The implementation of GST is likely to improve transparency and reduce tax evasion on account of better enforcement and compliance. The home buyer in general could benefit from the introduction of GST if the rates are moderate. The fact that works contract would be taxed as a service under the model GST law is a welcome move and is expected to provide certainty on taxability of the construction sector. This should lead to reduction in tax costs as the tax would be now charged on the actual contractual base and there would not be any overlap of VAT and service tax on a certain portion of such contracts like under the current regime
Anuj Puri – Chairman & Country Head, JLL India
In terms of cost reduction for manufacturers, the current tax structure has three layers at the central, state and city-levels, manufacturing units have to shell out a good amount of money to transport their goods. They end up paying multiple taxes on the transportation. Once GST is rolled out, there will be a common tax structure and thus, the burden of paying multiple taxes will go away. Such units will not have a varied tax structure for transportation of their goods to different locations and will not have to pay each time they transport goods, thus, reducing the overall cost. Likewise, there will be a cost reduction for logistics players, as logistics players create a stock transfer between inventory stocking points within states to avoid a multi-tax scenario.