Table of Content

Table of Content

'Realty check' on India's most radical tax reform!

Under-construction projects

An effective 12% GST on under-construction properties; stamp duty and registration charges untouched

Ready-to-move homes

No tax on completed and ready-to-move homes

Land Sales

No indirect tax on land sales as land considered as an asset under GST rules

Rental Market

Rents on residential properties continue to be tax free under GST

Introduction of input tax credit as part of GST is the biggest game changer as the benefit of input taxes paid at each stage of production will enable builders to pass on some of the cost savings to buyers. The effective GST rate of 12% on under-construction properties which subsumes all other indirect taxes will hopefully trigger an interest towards such properties and also lower prices. Narasimha Jayakumar, Chief Business Officer, 99acres.com

Industry Opinion

Understanding GST

 

What is Goods and Services Tax (GST)?

GST is a comprehensive indirect tax system charged on manufacture, sale and consumption of goods and services at the national level. It has replaced multiple cascading taxes levied by the central and state governments.

 

The biggest tax reform that the country has ever witnessed, GST was officially launched on the midnight of June 30th 2017 at the Parliament House. It was introduced as part of The Constitution (One Hundred and Twenty Second Amendment) Act 2017, subsequent to the passage of Constitution 122nd Amendment Bill.

 

HIGHLIGHTS
  • GST has replaced the myriad of indirect taxes such as VAT, customs, excise, service tax and entertainment tax
  • GST would apply to all goods except crude petroleum, motor spirit, diesel, aviation turbine fuel and natural gas
  • The government has opted for 4 slabs for both goods and services: 5%,12%, 18% and 28%
  • State and Union Territory GST laws have been passed by all the states and Union Territories of India except Jammu & Kashmir
  • The GST is governed by a GST Council and its Chairman is the Finance Minister of India.

 

How are Intrastate and Interstate GST different?

  • Intra-state level (when goods travel within a state) – Two types of GST will be levied at this level: Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST).
  • Interstate level (when goods travel between states) – At this level, Integrated Goods and Services Tax (IGST) shall be levied. Imports will be considered as interstate supply.

What does Zero Rated supply under GST refer to?

There are certain products and services which fall under the ambit of GST but are not taxed. Such supply is referred to as Zero Rated. This concept is covered under Section 16 of the IGST Act and applies to exports and supplies of goods and/or services to a SEZ developer or an SEZ unit.

 

Additionally, the credit of input tax may be availed for making zero rated supplies notwithstanding that such supply may be an exempt supply.

 

Who does GST apply to?

  • Every person who delivers goods and/or services of amount exceeding Rs 20 lakh in a financial year. For some special category states, the limit is Rs 10 lakh
  • Any person making inter-state taxable supply of goods and/or services
  • Every e-commerce player
  • Aggregators who deliver services under their own brand name
  • Casual Taxable Individual – an individual who has no particular place of business
  • Non-Resident Taxable Individual – a person who delivers and has no specific place of business in India
  • Individual required to deduct/collect tax (TDS/TCS)
  • Input Service Distributor
  • Entity supplying online information and providing database access or retrieval services from abroad to a person within India, other than a registered taxable person

GST is applicable for all businesses* and persons**

 

 *trade, commerce, manufacture, profession, vocation or any other similar activity regardless of the volume of trade.

** Individuals, company, firm, HUF, LLP, co-operative society, and trust. GST is not applicable to Agriculturists.

For further, inclusions or exclusions please refer below:

 

For GST rate on goods, please click here

For GST rate on services, please click here

 

The Goods and Services Tax (GST) is aimed at replacing the multiple taxes levied by the Centre and the State on sale and purchase of goods and services. The new tax regime offers a unification of various taxes, including –

 

1. Taxes levied by the Centre

  • Central Excise Duty
  • Customs Duty (CVD)
  • Special Additional Duty of Customs (SAD)
  • Service Tax
  • Central Sales Tax

2. Taxes levied by the State

  • State Value added tax (VAT)
  • Entertainment Tax
  • Luxury tax
  • State Excise Duty

All these levies are clubbed under GST into a single tax and charged by the Centre and State separately to meet their revenue requirements. The consumption-based nature of GST makes a State consuming the goods and services liable to pay the tax, instead of the one manufacturing or offering the goods and services.In order to keep it defined and simple, there are three types of taxes under GST against which tax-payers can take credit –

 

  • Central Goods and Services Tax (CGST) – Levied by Centre on intra-state supply of goods and services
  • State Goods and Services Tax (SGST) - Levied by States on intra-state supply of goods and services
  • Integrated Goods and Services Tax (IGST) – Levied by Centre on inter-state supply and imports of goods and services. This will ensure an easy flow of input flow credit between states since every state will have to deal with its taxes directly with the Centre and not with individual states.

For example:

A developer from Uttar Pradesh purchases cement from a dealer in Uttar Pradesh worth Rs 1 lakh. The 28 percent GST on cement will be shared between Centre and State on a 50:50 equity share model. Thus, out of the total Rs 28,000 tax levied on the builder, Rs 14,000 will be received by the Centre and another Rs 14,000 by the UP government.

 

Now, if a developer from Gujarat purchases cement from a dealer in UP worth Rs 1 lakh, they will still be levied with a GST of Rs 28,000. However, in this case, IGST would apply and the entire amount will be received by the Centre.

Case studies

 

France

The first country to introduce GST in 1954, France launched the tax regime to eliminate extremely high tax rates that encouraged smuggling and forgery. France implemented under a two-fold system:

 

  • CGST, which includes Central excise duty, service tax, and additional customs duties
  • SGST, which includes a) value-added tax b) central sales tax c) entertainment tax d) luxury tax e) octroi f) lottery taxes g) electricity duty h) state surcharges i) purchase tax

 

 FranceCanadaUKNew ZealandMalaysiaSingaporeIndia
Year of implementation 1954 1991 1973 1986 2015 1994 2017
Challenges - Price distortions - Rates changed twice Protests, inflation & weak consumer sentiment Protests by social activists, inflation spiked IT systems, adherence to anti-profiteering clause
GST/VAT/HST

Standard rate: 20%

Reduced rate: 5.5% & 10%

13%-15%

Standard rate: 20%

Reduced rate: 5%

Peak rate: 15% 6% 7% 5%-28%

 

China

China concluded VAT reforms in 2016 and replaced the existing business tax framework with GST. This helped deflate the Chinese real estate bubble. The country also implemented partial GST on certain select goods.

 

Japan

The country implemented consumption tax in 1989 at three percent. In 1997, this percentage was increased to five and soon Japan hit recession. In 2012, the tax was doubled to 10 percent.

 

Malaysia

After talks of implementation for 26 years, GST in Malaysia was finally executed in 2015. Some of the immediate challenges faced were low consumer confidence, inflation, anti-GST protests.

 
Canada

GST was introduced in Canada in 1991. The dual model mechanism is similar to India (state and central level). However, Canada gives options to provinces to go for state or central GST.


New Zealand

GST was implemented in New Zealand in 1986 at 10 percent followed by a two-time revision - 12.5 percent in 1989 and 15 percent in 2010. The change was made in an attempt to drive higher revenue and eliminate falsifications in the tax structure.


Singapore

Singapore announced GST in 1994. Post the implementation, inflation spiked and NGOs and social activist groups opposed the tax regime. Today inflation has eased and GST is the second largest source of government revenue after corporate IT in the country.

 

 

As many as 160 countries have adopted a unified tax system like GST. And, they all faced issues pertaining to inflation, scheme complexity, non-compliance, digital-dependence, and others. While the degree of challenges varied, like anything new, every country had their share of teething troubles with the radical tax reform. But mending the loopholes and addressing the impediments paved way to advantages such as easy input credit and reduced compliances. The table below summarises the major challenges some of the countries had to face.

 

Country Lessons/Challenges
Malaysia
  • About 1.5 years dedicated to preparation
  • Sector specific guidance paper on tax treatment
  • Anti-profiteering regulations
Canada
  • Multiple provinces, variety of tax rates
  • Challenges under GST/HST due to interpretation issues
European Union
  • Complicated VAT regime due to diverse exemptions
  • Reduced rates among member states distorts competitiveness
Singapore
  • Spike in inflation post GST implementation
  • Administrators did not keep tab on price movement


Source: Deloitte-CII CFO Report

Real estate and GST

 

The demonetisation move and Real Estate (Regulation and Development) Act, 2016 have already stirred the Indian real estate industry. Now with the confusion prevailing over the inclusion and extent of GST on realty, stakeholders are left in a state of bewilderment. 99acres.com tries dissecting the impact the tax reform is anticipated to have on all stakeholders –homebuyers, developers, brokers and others.

 

According to the GST regime, all under-construction properties will attract an effective 12 per cent charge on property values (excluding stamp duty and registration charges). It will not apply to ready-to-move-in projects as there are no indirect taxes levied on the sale of completed projects. The charge of stamp duty and registration fee will remain unchanged. Let’s begin with studying the probable impact of the aforementioned alterations.
  

GST and its impact on realty

  • GST would ease business transactions for both, developers and consumers by unifying all property buying taxed under one slab.
  • If the low-cost housing segment continues to be exempted under GST regime, such houses might become more affordable.
  • The sale of land is also exempted from the GST system, as land is considered neither a good nor a service but as “asset” under GST rules.
  • Steel products will be taxed at 18 percent under GST
  • Electricity is excluded from the GST ambit

The real estate sector will benefit as the subsidiary industries will also bear the positive effect of the new taxation regime. The introduction of Input tax credit under GST, which means that taxes are liable to be paid at the time of production stage or service delivery will ensure that the taxes apply only on value addition at every stage.

 

This implies that the consumer ends up paying taxes to the last dealer in the supply chain. In order to ensure smooth and seamless benefits from this provision, the government has added an anti-profiteering clause in the GST Bill under Section 171 of the law.

 

What is input tax credit?

The Goods and Services Tax allows manufacturers to avail input tax credits (ITC). To understand the term, we simply need to understand that GST is levied on purchase of both the raw materials (inputs) and the final product/service (output).

Input credit means that one can subtract the tax paid on inputs from the tax paid on output to reduce the total tax bearing.

 

For instance, in real estate, the raw materials include cement, steel, sand etc. A developer will be paying taxes on the purchase of these raw materials (inputs). Later, the developer will also incur tax on the completed product (output). Here, the developer will be allowed a credit equivalent to the tax paid on inputs which they can get deducted from the tax on output. Thus, if the input tax is lower than the output tax, the developer will be liable to pay the balance, whereas, if the input tax is higher than the output tax, they can claim a refund.

 

Example:

A developer purchases multiple raw materials for constructing a project –

Cement worth Rs 1, 00,000 – GST of 28 percent = Rs 28,000

Steel worth Rs 1, 00,000 – GST of 18 percent = Rs 18,000

Cement bricks worth Rs 1, 00,000 – GST of 28 percent = Rs 28,000

Glass slabs worth Rs 1, 00,000 – GST of 28 percent = Rs 28,000

Total tax paid on inputs = Rs 28,000 + Rs 18,000 + Rs 28,000 + Rs 28,000 = Rs 1,20,000

 

Scenario 1

Total cost of property constructed = Rs 50 lakh

GST on under-construction property (Total tax on output) = Rs 6,00,000

Tax to be paid by developer = 6,00,000 – 1,20,000 = Rs 4,80,000

 

Conditions for availing Inputs credits

Input Credits are allowed to manufacturers, e-commerce operators, supplies, agents and any persons registered under GST. However, in order to claim inputs credits, these entities will have to fulfil certain criteria –

 

  • They must have the tax invoice or debit note of purchase - Any individual seeking input credit must have the proof of the purchase and the tax incurred on it from a registered dealer. Input tax credit cannot be taken on purchase invoices older than a year.
  • They must have received the purchased products
  • The tax incurred on their purchase has been deposited to the concerning government by the supplier/dealer
  • The supplier should have filed the GST returns – This will ensure that the benefit is provided only if the tax has been paid to the government
  • The goods and services should not have been manufactured for personal use

How to claim input credit?

 

Seller A sells goods to Buyer B
Details of all tax invoices will go under GSTR 1
Buyer B to verify purchase of inputs
Details from GSTR 1 will reflect in GSTR 2A. Buyer B will either accept or reject the sales notification made by Seller A
Buyer B files for GSTR 2
GSTR 2 will fetch details of inward supply (recieving of goods/services) from GSTR 2A (approved by both buyer and seller)
If buyer rejects the entry in GSTR 2A, seller can review it in GSTR 1A
Generation of GSTR 3
When both parties accept the sale and purchase of goods and services, GSTR 3 is generated with payment of taxes
Tax gets credited to Electronic Credit Register
Taxes paid on inputs get credited in the Electronic Credit Register. Buyer B can adjust these against output tax liability incurred later

 

*GSTR 1 – Details of outward supply of taxable goods and services

**GSTR 2 - Details of inward supply of taxable goods and services

***GSTR 3 - Monthly return based on final details of outward and inward supply of goods and services along with the payment of amount of tax

 

Transitioning to a new tax regime of this gravity entails will entail several challenges that might hinder the progress of the implementation. Let’s take a closer look at the roadblocks that might impede the successful execution of the new tax system:
 
Being GST-Ready: The IT systems are overworked in an attempt to be GST-ready. Decentralised registration, invoices having multiple copies, deduction of GST per item for multiple slab rates and printing of these invoices have posed a challenge for now. IT systems will need to be overhauled in order to incorporate these changes.

 

Anti-profiteering clause: Strict adherence to the anti-profiteering clause is another challenge. In the absence of specific guidelines pertaining to the amount of benefit to be passed on to the consumer, it will be difficult to identify the actual advantage for all stakeholders. The anti-profiteering rules by the GST council have not addressed the calculation of profiteering, the level (product of service) at which the anti-profiteering enquiry has to be done and lastly, whether the gains or losses offset across sector can help determine the pricing.

 

Migration challenges: Due to complex rules and rate structure that have increased compliance burden, especially for small and medium companies, GST implementation has almost caused a near-term supply-chain disruption. A section of the economists believe that this might go against the ease of doing business in India.

 

Digitisation challenges: A number of businesses are not online yet and the proprietors do not have access to Internet, especially in Tier II and III cities and also in rural areas. However, everything under GST is online now. A business will have to file 37 returns in a year  - three returns per month and one annual return- per state. The shift from offline to online filing of returns is the biggest challenge that the country faces right now.

 

Major policy changes such as demonetisation, the Real Estate (Regulation and Development) Act (RERA) and GST are aimed at streamlining the real estate segment in the country. However, the contribution of these initiatives in bringing down property prices is still debatable.

 

While GST will undoubtedly facilitate a more comprehensive and uniform tax system in the real estate sector, the reform is unlikely to alter the pricing mechanism in the sector.

 

Under-construction properties

Before GST, the applicable service tax rate for an under-construction property was 15 percent. Post GST, the council has decided to fix the tax for construction of a complex or building at 12 percent for the homebuyer, however, the effective GST rate for the construction sector is 18 percent. For the homebuyer, the good news is that a deduction of land value equal to one-third of the total amount will be charged by the developer for the purpose of GST calculation.

 

Let’s understand the computation better with an example. If the value of your property is Rs 70 lakh, a developer can subtract up to Rs 22 lakh (one-third of Rs 70 lakh) as land cost and calculate GST at 18 percent on the remaining value of Rs 47 lakh.

 

The popular opinion is that excluding the stamp duty and registration cost from GST is a spoiler for the sector. The ongoing stamp duty fee hovers at around five percent; essentially escalating the total value of an apartment to 17 percent.

 

Game changer

The biggest game changer in GST is the introduction of Input Tax Credit (ITC), under which credit of taxes incurred at each stage of construction can be availed by the developer. The benefits accrued from this can be passed on to the consumer.

 

ITC plays a critical role in the deduction of the final cost of the property. The proper implementation of GST will determine the final effect of tax credits.

 

Construction sector

Concerns have been raised by the developer fraternity regarding the effective 18 percent tax applicable for the construction sector, including land tax of six percent. Therefore, all new real estate projects will be taxed at 18 per cent.

 

Cement will now attract an additional two percent tax while there has been a deduction of five percent for coal, limestone, and lignite.

 

Ready-to-move properties

Ready-to-move-in projects are kept out of GST ambit. Therefore, the overall prices of possession-ready apartments will largely remain unchanged.

 

The Indian real estate sector has been undergoing a metamorphosis, triggered by reforms such as demonetisation and RERA. While these reforms have already begun addressing the issue of non-transparency and accountability within the real estate sector, the implementation of GST will help resolve the multiple taxation system in the realty sphere.
 

While GST may not be instrumental in the property price movement, it will benefit all stakeholders in the industry backed by a uniformed and simplified tax structure. Inefficiencies in the supply network will reduce significantly resulting in better capital management and power in the hands of all stakeholders in the value chain including buyers, developers and middlemen.

 

Predominantly conceptualised around a ‘One Nation, One Tax’ philosophy GST is anticipated to usher the following benefits, thereby benefiting market sentiment:

 

  • eliminate the previous cascading tax structure
  • ease compliances
  • create uniform tax rates and structure, andreduce additional tax burdens on consumers
  • reduce additional tax burdens on consumers
  • make real estate affordable for homebuyers through the introduction of Input Tax Credit, whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition.

Backed by the above benefits, trust in the Indian real estate market is going to see an improvement, thereby increasing investments.

Advantages

 

For the real estate sector, GST reform is an initiative to regulate the unorganised and fragmented industry, however, its full-blown impact on homebuyers is yet to unfurl.


Short-term

In the short-term, homebuyers might defer buying decision to gain more clarity over GST’s impact on property prices. Transactions and sales volume have currently taken a hit owing to the volatility in the market on the back of consecutive policy reforms such as demonetisation, the Real Estate (Regulation and Development) Act, 2016 and now GST. Buyers, hence, are skeptical about taking the leap right away. A section of the buyers are also awaiting price correction.

 

Long-term
A lot will depend on the benefit that the developer passes on to the buyer for the input tax credit received. This aspect of GST will ensure that the end user bears the GST charged by only the last dealer in the supply chain, offsetting long-term savings for the homebuyer.

 

Developers were earlier levied central excise duty, VAT, and entry taxes for the raw material and construction inputs. Additionally, 15 percent tax on services such as labour, approval costs, legal and architect fees was also levied.

 

Under the new regime, construction costs will be rationalised. The input tax credits will ensure that some portion of the GST paid is refunded at the output stage, when the developer files for ITC. The overall reduction in cost of logistics will benefit the developers.

 

Real estate allied services such as construction, labour and others are going to be heavily impacted – some positively, some otherwise - with the new tax regime that has taken the Indian economy by a storm. Any increase or decrease in the tax levied on these goods and services is going to have a consequential impact on real estate prices, as well. Cement, for instance, will now be taxed at 28 percent instead of the earlier effective rate of 27-31 percent. The surge in cement prices would mean an increase in the overall cost of construction. Let’s look at other major alterations that have been announced under GST.  

 

Real estate - goods

 

Item Rate (in %)
Steel 18
Cement 28
Marble and granite 28
Blocks of marble and granite 12
Sand lime bricks and fly ash bricks 12
Natural sand, pebbles, gravel 5
Lifts and elevators 28

 

Real estate - services

 

Description of service Input tax credit Rate (in %)
Construction of a complex intended for sale to a buyer, wholly or partly, where value of land is included in the amount charged from customer Full input tax credit allowed 12
However, in case there is an excess input flow, no refund to be allowed
Composite works contracts (relating to immovable property) Full input tax credit allowed 18

 

While the aforementioned changes may take the price pendulum in one direction or the other, GST is likely to create the right climate for real estate to grow in the country. By bringing in more transparency and uniformity to the sector, it is going to boost market sentiment. Since VAT and service tax have been subsumed in one single tax now, property prices might become consistent across states, restricting the artificial surges in capital ‘asks.’

 

For the central and state governments, the introduction of GST will encourage ease of administration of taxes as multiple taxes at the central and state levels will not be levied anymore. Tax compliance will also be a smoother process. The seamless transfer of input tax credit from one stage to another in the supply chain will ensure tax compliance by traders. GST is expected to result in an increased revenue efficiency for the government.

Help Guide

 

What is GST?

Goods and Services Tax (GST) is a value-added tax that is applicable at each stage of the supply chain of goods and services. It is levied on the exact amount of value addition. The aim behind the implementation of GST is to eliminate all other indirect taxes in the system such as octroi, customs, VAT, excise among others. It is a destination-based tax and has two equal mechanisms - central and state.

 

What is input tax credit?

As part of GST, credit for the taxes paid at the previous stage in the supply chain is granted. This is done to ensure that tax is levied only on the quantum of value addition at every stage. This is likely to reduce the final cost of a product or service that is passed on to the consumer.

 

Who has to pay GST?

Individuals, traders and businesses with an annual turnover of above Rs 20 lakh are required to pay GST. In the case of northeastern states and some special category states, the starting point for paying GST is Rs 10 lakh.

 

Which existing taxes have been included in GST?

The following taxes have subsumed into GST:

 

  • Central excise duty
  • Additional excise duty
  • Customs duty
  • Service tax
  • Central cesses and surcharges
  • Value-added tax (VAT)
  • Central sales tax
  • Luxury tax
  • Entertainment tax except those levied by local bodies
  • Taxes on advertisements
  • Taxes on betting and gambling
  • Surcharges on supply of goods and services

Tariff barrier on imports, part of customs duty, however, is not part of GST.

 
Who decides the GST tax rates?

The CGST and SGST rates would be jointly deduced at the central and state levels. The notification would come on the recommendations of the GST Council.


What will be the advantages of GST?

  • GST will help in bringing transparency to the sector by way of input tax credit and anti-profiteering provisions.  
  • Will enhance ease of doing business
  • Boost revenue of central and state governments
  • Eliminate cascading effect of taxes
  • Increase tax compliance
  • Reduce overall prices of products and services
  • Improve the GDP growth rate 

What is the anti-profiteering clause under GST?

Clause 171 under GST Bill mandates that the benefit of input tax credit has to be passed on to the consumer via reduction in prices. The establishment of this authority will take counteractive action again complaints of profiteering and reverse the benefit of the reduced tax burden to the consumer with 18 percent interest. The business that is found practising profiteering business could also lose registration title under GST.

 

What products are not under the ambit of GST?

Products such as crude oil, diesel, petrol, natural gas and jet fuel have been kept out of the GST ambit for now. Liquor too has been kept out of GST as part of a constitutional provision.

 

Business

The word business encapsulates trade, manufacture, commerce, profession or any other similar activity. The term is expansive with reference to GST and includes transactions in services as well.

 

Capital goods

For manufacturers, capital goods is restricted to only those items used at the place of business. The definition is in line with the current definition in Rule 2(a) of CENVAT Credit Rules, 2004.

 

Consideration

With respect to supply of goods or and services to any person, consideration includes

  • any payment done or to be done, whether in monetary terms or otherwise, with respect to, or in response to, or towards the supply of goods and/or services, whether by the said person or by any other person
  • monetary amount whether in response to, or towards the supply of goods and/or services by the respective person or anyone else. 

Services

Services denote anything apart from goods. These include intangible property and unlawful claim but does not include money. Similarly, goods are defined to exclude intangibles. It is contested that inclusion of actionable claim might trigger an ambiguity with respect to certain financial and commercial provisions. Under distinct provisions, software supply, works contracts and any rental transactions will fall under the ambit of services.


Works contract

Works contract is regarded as an agreement pertaining to building, construction, creation, installation, retrofitting, modification, repair, facelift or commissioning of an immovable or movable property.

 

Composite supply

Composite supply includes any arrangement of services and/or goods delivered in the development of furtherance of trade. Such contracts might be regarded as bundled supplies as the primary principles of classification have not been encompassed in the Model GST Law. Specific rules might be announced for the same.

 

Disclaimer: The contents and provisions mentioned herein are subject to change. The views expressed herein are for informational purposes only and do not constitute legal advice. These views belong to industry experts and do not represent 99acres’ opinions on the subject. 99acres does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the information contained herein. You are advised to conduct an independent verification before entering into any transaction.
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