From 1st
April 2010, Goods and Sales Tax [GST] may be introduced as part
of larger comprehensive proposed tax reforms in the country. At present, parallel
systems of indirect taxation exist at Central and State levels. These need to be reformed and eventually harmonized. GST
will be a comprehensive indirect tax on manufacture, sale and consumption of goods
and services at state and national level. The real estate sector will also be impacted
by GST.
The basic concept of GST is that goods and services should
be taxed at the same rates and this is a norm followed across the globe. This
will give India a world class tax system, improve tax collections and remove the
existing distortions and differential treatment between sectors. Multiple taxes
like Octroi, Central Sales tax, State level sales tax, entry tax, stamp duty,
telecom license fees, turnover tax and others may be abolished once GST is
fully implemented. The cascading effect of multiple taxes will be avoided and seamless
credit across the supply chain will be possible under a common tax base. As a
movement towards GST, India's first step is to converge the existing rate of CENVAT
and Service tax. Revenues from GST will be shared between the Central
and Stat e Governments.
The real estate sector in India has always been one of the most
crucial sectors, given its contribution to the government exchequer, employment
generation potential and ability to attract significant investment. However, the
global financial crisis and the resultant slowdown in the global economy over last
one year have significantly impacted the sector across all asset classes such
as residential, commercial, SEZl Industry Parks. The sector is facing stiff pressure
on the price points, one of the key components of which is multiple statutory levies
and taxes. These include indirect taxes such as Excise duty, VAT/Sales tax andService tax on construction activity and Stamp duty on the entire sale value ofproperty. Further, the sector is also contributing through various State and
Municipal levels such as municipal taxes etc. Taken together, these levels
constitute a significant cost of most real estate transactions.
The problem is aggravated because of the ambiguities in the indirect
taxation regime applicable to the sector. For example, applicability of VAT and
Service tax on sale/lease of real estate continue to be subject of debate.
As the proposed implementation of GST inches closer, one would
expect rationalization and simplification of the taxation scheme. To begin with,
the total tax incidence under GST should not exceed that is levied under the
prevailing system (though any reduction in tax burden would certainly be welcome).
Further, the multiple levies currently applicable to construction and alliedactivities should be subsumed into a single GST, to the extent possible.
In order to ensure that the sector is not saddled with any
additional tax cost under GST, the implementing agencies would have multiple options.
The first and the most obvious choice would be to maintain status quo, by
keeping transactions involving sale/transfer of real estate outside the GST
ambit. Thus, such transactions may continue to attract only Stamp duty, ensuring
that there is no loss of revenue to the Government.
However, to make the new regime truly revenue-neutral for
the industry, the above exclusion should be accompanied by a lower GST rate on
key inputs that go into construction activity. This is because currently,
various building material (e.g. steel) attract VAT at a reduced rate of 4%. Further,
construction contracts are eligible for special composition schemes under VAT
and Service tax, which attract tax at a lower rate. Subjecting such items or transactions
to the standard GST rate (which could be in the range of 16% to 18%) would clearly
inflate the project cost and hence, the need for a lower rate.
The other proposition is to cover the sector within the
ambit of GST. The obvious advantage would be that GST chain would not be broken
and the developer’s builders would get a set-off/credit of taxes paid on construction
and services.
However, there would be several issues that require careful consideration.
To achieve revenue neutrality, a reduced/concessional rate of GST would need to
be considered. Also, in such a situation, Stamp duties and registration chargesshould ideally be subsumed into the GST.
Some special treatment may need to be accorded to special categories
of real estate, such as housing for economically weaker sections of society.
This can, for instance, be done by making such housing 'zero-rated' i.e. while
no tax is imposed on sale/transfer of such houses, refund of input taxes is allowed
to the developer. Similar treatment can be considered for construction of
Government buildings.
Even internationally, in many countries, real estate
transactions have been given a preferential treatment under the GSTNAT regimes.
For instance, supply of real estate property is subject to "going concern"
(which is equivalent to zero rating) concession, on fulfillment of prescribed
conditions in Australia, and in United Kingdom supplies of private residences
are zero rated. Supply of immovable property situated in France is generally exempt
from VAT in France.
Whatever be the mode of taxation, so long as it meets the twin
objectives of revenue-neutrality and simplicity, it should be welcome by the
industry players and also large sections of population aspiring to acquire a
property.
In any case, for industry at large, GST is expected to have
a significant impact and the developments in this regard should be closely
monitored. Implications on purchases, contracting, pricing, cash flows etc. need
to be analyzed, in addition to the changes in IT systems, accounting and other
internal processes.
Clearly, adapting to a tax reform of such magnitude will be
a challenge, successful transition to which would require concerted efforts and
understanding of all the stakeholders.
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