The Real Estate Sector is the fastest growing sector all over the world as well as in India. It is growing rapidly and we can access its growth by demand of affordable housing requirements, proposed development of new cities, initiatives of government for modern cities as “Smart Cities”. Owing a residence is dream of every Indian citizen and the demand as well as prices is growing day by day. The Real Estate Sector has employed or given employment major workforce in the country and has contributed a lot in the GDP of the country. The contribution of Real Estate Sector in the GDP of India will also double from 6.3% in 2013 to 13% till 2015.
One of the most complex areas of the tax levied by the Centre and the States is Works Contract and Sale of Property. Currently, such transactions are broken into three parts:
– Value of goods and materials,
– Value of services; and
– Value of land.
Presently, builders/developers are paying following indirect taxes:
– Service tax (ST) on services either to provider or on reverse/ joint charge (sub contractors, manpower supply etc);
– Value added tax (VAT)/Central sales tax (CST) on steel, cement, RMC, electrical sanitary, lifts, DG sets etc;
– Excise duty on all items paid earlier to those on which VAT paid;
However, in GST all the above taxes would no more be applicable and there will be only one tax i.e. GST. However, Stamp duty would continue to be in force even after advent of GST.
Real Estate Sector should be included in GST due to following reasons
1. The Real Estate Sector is subject to multiple taxation scheme by the government, the Central Government has levied Service Tax on under constructed projects with no explicit tax on the transaction value of land, the State Government are charging VAT and Composite Tax on various materials used in the construction, without benefit of Input Tax Credit. Each authority taxes on aspects and valuation independent of the others. The State also collects stamp duty and registration charges for the registration of property. Real estate transactions unfortunately are subject to manipulation and undervaluation in most parts of India. The inclusion of Real Estate Sector in GST increases transparency and organisation in the sector.
2. Various ancillary industries such as cement, steel, brick, timer, fittings, building materials and many others are dependent on the real estate sector which constitutes a major part of Gross Domestic Product. However transfer transactions under this sector are not fully taxable, which has a spill over effect on other sectors and results in non-transparency and non-availability of credit. If it will be included in GST, then there will be a chain of transactions which will improve the tax base and bring transparency.
3. There are various duties are levied on this sector and there is no provision for claiming set off, which makes taxation in this sector hectic and lethargic. There is tax evasion due to this condition. Now including the real estate sector under GST, the revenue loss to the government will stop and set off facility will provide transparency and good taxation environment.
Work Contract under MGST
“Works contract” means a contract wherein transfer of property in goods is involved in the execution of such contract and includes contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property.
As per Schedule II of MGST:-
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 shall be treated as Supply of Service, except where the entire consideration has been received
– After issuance of completion certificate,
– Before its first occupation, whichever is earlier.
Suggestion submitted by ICAI on Revised Model GST Law
It is suggested that the definition of works contract be suitably clarified to bring out the clear intent of the legislation:-
– Whether only ‘Immovable Property’ emerging from a work contract are treated as Works Contract and ‘Movable Property’ is taxed based on the concept of Composite Supply or whether both ‘Movable and Immovable Property’ will be Works Contract.
– Where the contracts of repair and maintenance of moveable properties would get covered under the said definition of works contract or not.
The immovable property part is expected to be excluded from the GST in terms of the decision of the Supreme Court in case of L&T (2014(303) ELT (003) in para 115. Herein the value of land and completed construction as on the date buyer comes to developer and gets into an agreement would be out of the purview of GST. Hopefully, the basis of deduction of the land value from the transaction liable to GST must be unambiguous and clear. Any ambiguity would only open the Pandora box of disputes.
Seamless flow of credits: In GST regime all the above duties/taxes (except stamp duty) will get subsumed, therefore a builder should be able to avail the input tax credit of all its procurement of goods/ services except for few restrictions placed in the Model law. Therefore, it would reduce the tax costs substantially in the construction industry. Under GST, it is expected that seamless credit of all taxes paid on procurement of goods/ services will be allowed so that net outflow of GST liability would be minimized.
Broadened Tax base: Many construction contracts which are exempted in the current regime (especially the government contracts) could be brought under the tax net in the GST regime. Therefore, if any long term contract is entered in the current tax regime now but if GST is implemented, then the same would be taxable under the strictures of the GST law therefore, It is important to factor the GST impact while arriving at the price of the contract and the burden of the taxes must be clearly reflected in the contract to avoid any complications at a later date.
Expected Rate of Tax: The GST Council has agreed upon the 5 rate structure for levying tax on various goods and services i.e. 1%, 5%, 12%, 18% and 28%. It is expected that the rate of GST that may be applicable on this sector would be mostly 12%. There may not be any further abatement/ composition on this rate. Although this rate will be little on the higher side as compared to current tax rates which is between 6% to 10%. Although such high rate could have an adverse impact on this sector, however this impact could largely get reduced due to ease in credits availability.
GST on Joint Development Agreements: GST will also be levied on the Joint development agreements as Barter also amounts to ‘Supply’. Comparative flat value may have to be taken for calculating GST on such transactions. There clear mechanism as to time of supply and valuation has not been explicitly provided. However, if it is not clarified then the current disputes surrounding this area would continue in the GST regime. The need for treating JDA differently from construction contracts may not be there.
Treatment of the Land Component: Since stamp duty is being paid, it is expected that the land component would be allowed as deduction in the valuation of real-estate transactions in the GST. However, the issues w.r.t the valuation of land to be adopted and claimed as deduction could continue to be a cause of dispute. Currently, even in the revised model law, no clarity has been brought in as to the valuation of the land. However, it is expected that the same must be clarified by way of issuing a notification during the GST regime. Unclear provisions in this context could lead to large scale disputes.
Requirement of completion certificate: Similar to provisions in service tax, GST is said to be levied if amount is received prior to completion certificate and there would be no GST if the entire amount is received after the completion certificate. Further, it is also stated that even if completion certificate is not received, GST may not be levied after the first occupancy of the premises. This would provide relief to builders who for various reasons were unable to obtain the completion certificate from the authorities and as a consequence were denied the exemption from service tax.
Treatment in case of SEZ/ EOU’s: There is no clarity in the model GST law as to continuity of the exemptions in respect of EOU’s. However, as far as units operating in the Special Economic Zone are concerned, it is explicitly stated that same will be on par with the exports and therefore such supplies will be treated as a ‘Zero Rated Supplies’ therefore no GST needs to be charged for supply of goods or services to the Special Economic Zones.
GST on Stock Transfers: Since, transfer of inputs/ capital equipments from one site to another is quite common in this sector. Therefore, builders operating from multiple locations in different states, then it would require to pay GST on stock/ Assets transfers from its premises in one state to its premises in another state. Further, in case builders are having multiple business verticals within the state and if a builder opts to take separate registration for each such business vertical, then GST needs to be paid for stock transfers even when made within the same state.
Multiple Registrations: Concept of centralized registration for all the projects will end and builders having a site in multiple States would require to obtain registration in each State from were the construction activity/ supplies are being undertaken even though the project is for a very small period or for a small value. Although, this scenario is in existent in the current law for the state taxes but the same will now be done even for the central taxes.
High Compliance burden: Compliance burden will be very high in the GST regime as one has to file 37 Returns in one financial year for each registration. Further, returns filed will be matched online with the support of the IT infrastructure with the returns of the vendors/ customers. In case taxes are not paid by the vendors or if the returns are not filed by the vendors, then the credit of such taxes is denied to the customers. Therefore, timely payment of taxes, filing of returns needs to be ensured in the GST regime.
Transitional Credits: To transfer the existing credits in the GST regime, condition has been kept that such credit must have been admissible in the GST regime. Therefore, builders should be able to transfer the following credits to the GST regime:
– Credit of Service Tax: The same must be properly reflected in the last service tax returns and documentation must be in place to establish the same. Further, service tax credit pertaining to inputs in stock can also be availed.
– Excise Duty/ CVD: Since, currently builders are not availing the credit of excise duty & therefore, builders need to ascertain the value of stock as on the appointed day and based on the availability of the invoice, credit can be availed.
– VAT/ SAD: Similarly, if a builder is not availing the credit of VAT/SAD currently due to restriction in the state VAT law or due to being in the composition scheme, then the credit can be availed based on the ascertainment of stock as on appointed day. However, if the credit of VAT is being currently availed then the same needs to be properly reflected in the last VAT return to transfer such credits to the GST regime. Note: Section 169 relating to transitional credit on stocks also provides for deemed credit at rates to be prescribed in the absence of duty/ tax paying documents
– Credit of CST: The same cannot be availed based on the stock availability as on the appointed day.
– Entry Tax: Credit of same can be availed subject to possession of appropriate documents for the same in states where such set off is permissible.
Anti-Profiteering Measures: Since a builder will be able to take the credit of goods lying in stock, the tax cost would decrease. This additional benefit accruing to the builders is expected to be passed on to the end consumer by way of reduction in prices etc. A separate authority will be formed in the GST regime to monitor the non-compliance of the anti-profiteering matters which could have an adverse impact on the entire construction industry whose pricing is more market dependent than other factors. Therefore, it is imperative for the builders to establish passing of the GST benefit to its consumers. In these times of falling prices this may not be challenge though.
Time of Supply in GST: Currently, many builders pay taxes on receipt basis (without complying with the point of taxation) in case of service tax i.e. tax is paid only once the monies are received from the customers. However, in the GST regime, tax needs to be paid immediately on earliest of completion of service, raising of invoice or receipt of monies from customers. This could have an impact and could cause blockage of working capital.
Place of Supply in GST: The place of supply of services shall be the location at which the immovable property is located or intended to be located. If the location of the immovable property or is located or intended to be located outside India, the place of supply shall be the location of the recipient.
Where the immovable property is located in more than one State, the supply of service shall be treated as made in each of the States in proportion to the value for services separately collected or determined in terms of the contract or agreement entered into in this regard or, in the absence of such contract or agreement on such other reasonable basis as may be prescribed in this behalf.
Classification issues: It seems that certain disputes in classification may arise in the GST regime if a separate rate of tax is maintained for the construction and other additional services provided by the builders such as floor rise premium, car parking etc. Based on the terms of the contract and the nature of the supply, it needs to be determined whether it is a ‘composite supply’ or a ‘mixed supply’ and accordingly rate of tax for the additional services needs to be determined. Therefore, if the construction agreements are not in line with the naturally bundled understanding then any differential rate if applicable could be a cause of concern.
Valuation complexities: Valuation of the services would be at the transaction value. However, valuation with the related parties/ between the group companies needs to be properly dealt with and must be kept at the arms length price to avoid unnecessary departmental intrusion.
Good IT Infrastructure: In GST regime, businesses have to move from the manual environment to computerized environment. Only an efficient IT infrastructure and its best usage can help businesses meet the high compliance needs of the GST. If IT infrastructure is not optimally utilized, then it would be challenging for any business including real-estate sector to function efficiently in the GST regime. Further, in the computerized environment, physical interaction with the department officials would reduce substantially. ERP must be customized to make it capable to meet needs of the business as well as comply with GST.
The Task Force of GST has recommended;
1. The Stamp duty as levied by the States on sale or transfer of immovable properties should be included in GST in order to facilitate Input Tax Credit and to eliminate cascading effect. However, the fact that the stamp duty payable on property is not subsumed in the GST could prove to be a dampener for buyers.
2. GST should apply to all newly constructed property (both residential and commercial).
Let’s Consider an Example;
X Constructed a House for Self Use;
Cost of Construction Rs. 20,00,000/-
GST Paid of raw materials Rs. 1,00,000/-
GST Rate @10%
Now GST on Rs. 20,00,000/- Rs. 2,00,000/-
Paid on input Rs.1,00,000/-
GST Payable Rs.1,00,000/-
Suppose the house is sold;
Consideration to Mr. X Rs. 20,00,000/-
GST Paid of raw materials Rs. 1,00,000/-
GST Rate @10%
Now GST on Rs. 20,00,000/- Rs. 2,00,000/-
Paid on input Rs.1,00,000/-
GST Payable Rs.1,00,000/-
Now in both cases credit should be allowed in respect of Input Tax Credit on raw materials unused in the construction of residential house.
3. In case of rental charges related to commercial and residential properties should be included under GST by giving set off facilities of GST paid on goods and services used in maintenance of residential or commercial properties.
4. If property has been constructed after the introduction of GST, the GST should be levied on the Resale Value and Input Tax Credit should be allowed in respect of the GST paid upon construction or purchase of the property after making adjustment for inflation.
5. If property has acquired before introduction of GST by the seller the GST should be levied on difference between the sale price and the cost of acquisition and cost of improvement thereto. Now in this case no Input Tax Credit will be allowed.
6. Now in new GST regime immovable property will also include land. Now in case of land, if used in construction of property, then land will be treated as input. The GST paid in respect of land will be allowed as Input Tax Credit in the same manner as other construction materials.
Thus it is important to include Real Estate Sector under GST, to increase tax bane and reduce RRN rate. Since this sector will provides various types of development opportunities in near future also. The need if implementation of GST for good selves of our country as well as World.
The implementation of GST is possible from July 2017 or little later. Migrating to the new tax regime could have substantial impact on the business houses. There would be a positive impact for those who are vigilant. The negative impact of the GST can largely be averted if counter measures/ preparedness are in place. There are two open items because of which at present it is difficult to predict accurately the impact of GST on real estate transactions. One is the GST rate and second is abatement for land value in total agreement value of under construction residential unit. However, businesses need to re-look and action must be taken on the following areas to reduce the adverse impact of GST:
– Contracts/ Agreements re-alignment to suit the needs of GST of breaking up into the immovable part which is complete and construction to be completed;
– Business re-structuring/ Transaction re-structuring;
– Understanding the impact on various business departments including procurement, sales & Marketing, finance & Accounts, IT, Admin & HR etc. and re-structuring the same to suit the needs of the GST;
– Optimizing the transitional credits, future credits.
– Ensure original entries are verified; keep evidences of tax payments etc;
– Representing through various bodies/ associations on various adverse provisions of the GST law;
– Conducting in-house training programs for learning & development of staff to ensure smooth implementation into the new regime.
The views expressed in this article are of the Team GST Cornor(s). The information cited in this article has been drawn from various sources. While every effort has been made to keep, the information cited in this article error free, team GST Cornor does not take the responsibility for any typographical or clerical error which may have crept in while compiling the information provided in this article.
Source:- Reference of article of CA Madhukar N Hiregange, CA Ravi Kumar Somani, CS Deepak Pratap Singh on real estate topic is consider in preparation & compilation of this note in addition to MGST, Websites etc.
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