At a financial planning seminar in Delhi, a home buyer had a pertinent question: “Although GST may help the builders to avoid double or triple taxation and reduce their cost of construction and operation, how will it help me when buying a house? Paying VAT of 5% on construction material and 3.5% service tax, may still be lower than what is being proposed in the GST – a minimum of 18% tax.”
This confusion, over the impact of the proposed Goods and Services Tax (GST), is being echoed by home buyers, as well as the real estate fraternity. Many are even questioning whether the dual model of GST, as proposed by the empowered committee, will simplify and reduce the tax burden or further complicate the situation. Under this dual model, there will be a Central GST (levied by the central government, along with excise duty, surcharge, cess, service tax, etc.) and a State GST (levied by the state government, along with VAT, entertainment tax, luxury tax, tax on lottery, entry tax, cess, surcharge and others). The nature of real estate business, is such that both, the Central GST and State GST will fall into its ambit.
While it is expected that the sale of immovable property after its completion, would continue to be outside the purview of GST and be applicable only on stamp duties, the proposed shift to GST does not seem to be clear of uncertainties. Moreover, there is no clarity over key issues, such as the transfer of development rights (TDR) on land, taxable value for goods and services, taxability of joint development agreements, etc. Experts, hence, question how GST will simplify the indirect taxation in the real estate sector.
Service tax and VAT are the two main levies on real estate, today. Nevertheless, there are constant disputes on the rate of tax and the base on which it has to be charged, given the multiple options available for discharge of taxes across states. This has resulted in diverse practices being followed by developers, across states and even within the same micro-markets.
Impact on prices
Tax consultant, Rikki Sahni, feels that prices may increase marginally, if any rate over 15% is applied for materials and services. “However, the realty industry, which contributes significantly to the Indian GDP, will benefit from GST in the long run, as it will create homogeneity and standardisation. There are two different aspects that impact developers. A major issue is how land is valued. A lot will depend on the deductibility of land in GST calculations. Moreover, if CENVAT credit is offered in the construction sector, it may benefit developers of commercial properties. A lot of clarity is still needed,” Sahni explains.
According to Nikhil Hawelia, managing director of the Hawelia Group, the GST regime will definitely help the sector in the long run. However, its immediate impact on home buyers remains unclear. “For the developers, the total quantum of tax may or may not increase, depending on whether the purchase of land is measured as a major source of input cost. Even if taxes increase a bit, it will at least bring clarity, as compared to the existing multiple layers of taxation. Home buyers, nevertheless, may end up paying more taxes,” says Hawelia. Financial analysts largely agree that GST may increase the prices of homes, even if it is not directly charged from home buyers, as developers will pass on the additional tax burden to buyers.