News Point: GST has confused the home buyers as back of the envelope calculations suggest they would pay more taxes.
“GST might be helping the builders to avoid double or triple taxation and their cost of construction & operation might come down, but how will it help me when buying a house,” questions an inquisitive homebuyer in one of the financial planning seminars at Delhi.
“Even though I assume that today I am paying for the builders’ 5 per cent payment of VAT over construction material and 3.5 per cent Service tax, my tax structure is still lower than what is being proposed in the GST – a minimum of 18 per cent tax.
This homebuyer is not alone in carrying this confusion with the proposed GST (Goods and Services tax). The real estate industry is indeed plagued by the uncertainty as far as the impact of GST over the sector is concerned. As a matter of fact, many within the built environment are even asking as to how it will simplify or reduce the tax burden if the dual model of GST, as proposed by the empowered committee, is implemented.
GST impact
- GST makes builders euphoric and home buyers confused
- There is no clarity over many contentious issues that could reduce the tax burden of home buyers
- Back of the envelope calculations suggest homebuyers will end up paying around 20-22 per cent in total tax compared to 14-16 per cent if builder gets tax credit
Most of the analysts agree that the implications of GST or home buyers are not clear as of now. If only the rates are lower than the present rate that the home buyers pay, they can benefit. But some back of the envelope calculations suggest homebuyers will end up paying around 20-22 per cent in total tax compared to 14-16 per cent if builder gets tax credit.
The developers nevertheless have reasons to feel elated. Vineet Relia, Managing Director, SARE Homes maintains that 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. However, for the developer, the aspect of valuation is a matter of concern as currently no deduction is provided under GST for value of land. This can contribute to higher tax burden considering that there is already an additional tax incidence in the form of Stamp duty on value of land,” says Relia.
In the dual model of GST there will be Central GST, levied by the Centre with Excise Duty, Surcharge and Cess, Service Tax etc, and State GST, levied by the states with VAT, Entertainment Tax, Luxury Tax, Tax on Lottery, Entry Tax, Cess and Surcharge etc.
The nature of real estate business is such that both the Central GST and State GST will fall into its ambit. There is hence apprehension within the built environment that whether GST is indeed the solution to a business that has complex structures and issues.
For example, there is no clarity over the key issues like transfer of development rights in land, taxability of joint development agreements, taxable value for goods and services, etc. It is hence questioned as to how the GST will simplify the indirect taxation with real estate sector.
While it is expected that immovable property transaction, which means transfer by way of sale of immovable property after completion, would continue to be outside the purview of GST and be liable only to applicable stamp duties, the proposed shift to the GST regime does not seem to be as clear of uncertainties as it is being suggested.
As things stand, in real estate there are two primary levies today – Service tax and VAT. There, of course, is overlap of tax base and constant disputes on the rate of tax, given the multiple options available for discharge of taxes across States. This has resulted in diverse practices being followed by developers, across the states and even within the same micro markets.
If the GST regime proposes to put to rest these uncertainties and ambiguities then the taxes paid by the homebuyers across the country should be more or less be the same.
Rikki Sahni, tax consultant, agrees that the GST impact on real estate market is somewhat uncertain right now. However, the chances are that if any rate over 15 per cent applies for material & services, the prices may increase marginally. This must be viewed with a long-term impact, as GST shall be beneficial overall for the real estate industry.
“An industry which contributes massive numbers to the Indian GDP will benefit from the GST because it will help create homogeneity as well as standardisation. There are two different parts which impact developers. A major issue is how land is valued. A lot will depend on land deductibility in GST. Moreover, if CENVAT credit of construction is set-off, it may benefit commercial developers. So, a lot of clarity is still needed,” says Sahni.
A candid Nikhil Hawelia, Managing Director of Hawelia Group says there are two aspects of GST impact on the real estate – the developers and the homebuyers. According to him, the GST regime will definitely be a great help to the sector in the long term but its immediate impact on the homebuyers is still not clear.
“For the developers the total quantum of tax may or may not increase, depending on the land purchase being measured as a major source of input cost. Even if it increases a bit, the same will at least bring clarity against the multiple layers of taxation. The homebuyers nevertheless may end up paying more in terms of taxation as one is so far exempted from the overall tax burden being passed on by the developers,” says Hawelia.
Most of the financial analysts agree that the GST is all set to increase the home prices, even if the GST is not directly charged from the homebuyers. The reason being that any additional tax burden to the developers, which is highly likely if land as input cost is not deductible, will be passed on to the homebuyers in the form of sale price. The common grouse of the developers would be increase in the input cost that includes taxation part.
By: Ravi Sinha
