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GST rate reduction to 5% in realty sector: A winning stroke or a run out - GST Station

GST rate reduction to 5% in realty sector: A winning stroke or a run out

GST rate reduction to 5% in realty sector: A winning stroke or a run out

    The basic ethos underlying the implementation of GST was revenue neutrality which means that the tax burden essentially pre and post GST regime remains the same.

    The real estate sector in India has faced several headwinds over the past few years. Demonetization in 2016, the introduction of GST in 2017 and the NBFC crisis in 2018. The question now is whether the revised scheme of GST will be a similar event in 2019.

    At the outset, sale of a property pre and post construction, by a developer, has been treated differently for the purpose of levy of indirect taxes. This basic issue still bothers the sector as both the transactions eventually entail the sale of an immovable property.

    Be that as it may, the scheme of taxation for this sector has been continuously changing. With this recent change, this sector is evidencing the 4th regime of taxation, within a decade as under.

    2005-2010: Tax levy disputed. Finally held liable by Supreme Court. Liable to both-VAT and Service Tax. Credit of only VAT and no Service Tax.

    2010- June 2017- Liable to both -VAT and Service Tax. Credit position reversed. Credit of only Service Tax and no VAT.

    July 17- March 2019- Liable to GST with full credit.

    April 2019 onwards- Liable to GST with no credit.

    The basic ethos underlying the implementation of GST was revenue neutrality which means that the tax burden essentially pre and post GST regime remains the same.

    However, one sector which stands out in revenue neutrality approach not being maintained is the Real Estate sector, which is evidenced from the fact that up to March 31st, 2019, the GST rate of an under-construction property was 12% (effective tax rate). This proved to be a massive jolt to the real estate industry which was anyway struggling to stay afloat.

    Post several representations being made by the industry and based on the recommendations of the GST Council, the Ministry of Finance finally notified a revised scheme whereby a GST rate of 5% without ITC , would be applicable to the sale of an under construction residential unit.

    However, is this scheme of 5 % GST without ITC more beneficial than 12 % with ITC? Though the optics seem very good, on analysing the finer details, one can infer that this move does not actually tilt the balance favourably to the sector or the consumer. The government has effectively retained the same tax burden but in fact in most cases, developers and consumers are worse off.

    To understand the real impact of the GST rate reduction, it is important to understand the hidden effects of denial of input tax credit on the costs of construction and on the marketing costs.

    In the extended suburbs of the metros and in Tier II and Tier III cities, the ratio of cost of construction and marketing (Cost) to Sales Price (SP) is as high as 45% to 50%. Consequently, the overall tax burden borne by the customer will now under the revised scheme be in the range of 14-15 % [Input tax cost INR 9 (45 *20% {avg rate with cement being 28 %}) plus tax on output INR 5, totally amounts to INR 14].

    In a nutshell, the tax costs in the transaction is likely to be more and not less as would be expected.

    It is also important to view the issue from the lens of anti – profiteering. Any reduction in rate of tax should ideally result in decrease in cost for the customer. This is the very core of the principle of anti- profiteering. However, what does a developer do in a scenario where due to the non-availability of ITC, the costs of the project have actually increased?

    Currently though, the anti-profiteering authority may expect, the benefit of a lower rate of GST to be passed onto the customer, after adjusting the loss of credit. Establishing the increasing costs before the anti-profiteering authority while still adhering to the anti-profiteering principles is now a challenge to the developers.

    Adding to the industry’s woes the states of India have increased stamp duty by 1%. For example, in Maharashtra the stamp duty has been increased to 6%.

    At best this move of reduction to 5% has achieved certainty for the industry. Also, the customer is correct in expecting a lower price of housing, however, the developers are facing their own set of woes – on one hand they need to meet the customers’ expectations and pass on the lower rate of GST, however with the denial of ITC to them, they are squeezed from both ends of the spectrum.

    When one considers the overall scheme of things, is this rate reduction of 5% a winning stroke or a run out, only time will tell.

    Source- ET Reality.

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