GST IN REALTY: BUILDING BLOCKS OR STUMBLING STONES?

BY Realty Plus

The plinth of GST was laid on 1 July 2017, setting the foundation for a monumental tax structure that continues to be constructed, piece by piece, reshaping India's economic landscape. While the real estate sector, a cornerstone of the Indian economy, has been adapting to GST, the journey has unveiled a mix of opportunities and challenges, as outlined in the ensuing paras.

The Brighter Facet: GST's Positive Ripple in Real Estate

1. Simplified tax structure: Prior to GST, the real estate sector grappled with various taxes like VAT, service tax, and stamp duty, along with various rules and conditions for claiming the CENVAT Credit, leading to a complex tax regime. GST streamlined this by bringing most of these under a single umbrella, reducing the need for the developers and buyers to adhere to various laws.
2. Increased transparency: The input tax credit (ITC) mechanism under GST ensures that developers pass on the benefits of tax credits to buyers, leading to a reduction in the overall cost of properties and increasing transparency in pricing. Despite changes in taxation and eligibility for the Input Tax Credit (ITC), authorities were vigilant in ensuring that the benefits of rate reduction reached buyers. They provided multiple GST levy options during the transition period to guarantee that these advantages were appropriately passed on. 
3. Boost to affordable housing: The government's decision to levy a lower GST rate of 1% for affordable housing (without ITC) has given a significant boost to this segment, aligning with the national mission of "Housing for All."
4. Structuring the informal sector: One of the notable benefits of GST in real estate is its role in making the sector more structured. Previously, transactions involving unregistered entities often escaped the tax net, leading to a parallel informal economy. With implementation of reverse charge mechanism upon purchase of certain materials from unregistered persons beyond a certain threshold, not only the tax base was broadened, but it also encouraged compliances, reducing the prevalence of informal transactions and contributing to a more organized and accountable real estate sector.

The flip side: Hurdles of GST in real estate

1. Limited input tax credit benefits: The restrictions on availing input tax credit on certain construction materials and services has diluted the cost-saving potential of GST for developers, indirectly impacting property prices, which is ultimately borne by the buyer.
2. Complexity in compliance: Despite the initial promise of simplicity, the real estate sector faces certain challenges in the day-to-day compliances due to complex rules, frequent amendments, and varying interpretations, leading to confusion and increased compliance costs. The necessity for state-wise registrations, project-specific monitoring, credit reversals, and the restriction on cross-state utilization of input tax credits are among the perplexing issues that continue to concern the industry. Again, the mandate of obtaining registration as Input Service Distribution could further trouble the industry players who are operating PAN India.
3. No GST on land component: The exclusion of the land component from GST calculations has led to ambiguity in determining the actual tax liability, as various jurisdictions/ locations follow different valuation mechanism to determine the land value.
4. Stamp Duty still persists: The continued existence of stamp duty, a state levy, alongside GST, contradicts the objective of a single-tax regime and adds to the cost burden on the buyers.
5. Complexities in Joint Development Agreements (JDAs) and Transfer of Development Rights (TDRs): The GST structure for JDAs remains complex, leading to confusion and disputes. The quest to resolve the enigmatic dilemma of classifying Transferable Development Rights (TDRs) as either a "supply of services" or "supply of land" continues to spark heated debates and courtroom confrontations, with no clear resolution on the horizon. Despite hopes for simplification with GST being introduced, these challenges continue to complicate collaborative project execution.

The rights and wrongs of GST in the real estate sector are intertwined, reflecting the teething troubles of a transformative tax reform. From the industry experts’ viewpoint, the real estate sector's journey under GST can still be treated as an under-construction plot. While it has been the endeavours of the law makers to bring in a certain level of uniformity and transparency (which has happened to a large extent), there still persists a darker side which leaves behind a room for further improvements and refinements. One such bigger and bolder move could be integrating stamp duty within the ambit of GST, paving the way for a ‘truly’ unified tax regime in real estate.

As the sector continues to adapt and evolve, the focus should be on striking a balance that fosters growth, affordability, and transparency, ultimately benefiting both developers and buyers in the longer run.

Tags : Simplified tax structure GST input tax credit real estate sector fosters growth affordability transparency Transfer of Development Rights affordable housing