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.