Think twice before drafting real estate into GST

At a time when it is being widely debated whether the Indian economy is rising or falling comes the good news that India has risen 30 ranks — from 130 last year to 100 now — on the World Bank’s ‘ease of doing business’ scale, helped by a slew of reforms in taxation, licensing, investor protection and bankruptcy resolution. It is apparent that the World Bank has given a thumbs-up to the introduction of GST in India despite the fact that there have been many complaints at the ground level on the manner in which it has been implemented.

The problems in GST are well-known and have been widely reported. Too many rates of tax, a large number of notifications and circulars, an extremely moody portal, artificial restrictions on credit and lack of clarity on some of the GST forms top the list of issues. It is ironic that four months after the introduction of GST, extension of time is being provided to file forms, due to which taxpayers are still not able to file the trilogy of forms in a single month to enable matching of invoices and seamlessly avail credit. Some stability is expected only from April next year.

There is, thus, a clear disconnect between the government’s intentions behind GST and how it has been implemented on the ground till date. While there is no doubt that a reform as disruptive as GST is no easy task for our country, it is clear that the government did not prepare itself adequately to address this disconnect. Although GST retains many features of the taxes it replaced, most of the implementation issues can be traced to what is new in GST — areas such as matching of invoices, filing of transition returns and setting off of credit.

While these areas are new, the people implementing them are, for the most part, the same ones that implemented the old taxes, and these are people who are used to imposing unnecessary conditions just because the statute uses the words “subject to such conditions and restrictions as may be imposed.” This is clear from the wording of many notifications that have retained the flavour of the old notifications — loosely worded and which can be interpreted differently by different people.

The GST Council should take upon itself the immediate task of setting up a panel to issue notifications and circulars that are clear, easy to understand, and meet the test of quality, rather than quantity. If this is not done, one can only expect a large number of notifications and circulars that will soon lead to litigation.

When the implementation of the law is in such an uncertain phase, the government needs to think twice about bringing in the real estate industry under GST. In a talk at Harvard University, Finance Minister Arun Jaitley said that the one sector in India where the maximum amount of cash generation and tax evasion takes place is the real estate industry, which is outside the GST. He went on to say that bringing real estate under the ambit of GST would result in consumers paying one final tax on the property. The latter may be only partially true since stamp duties levied by the states have not been subsumed into GST.

Uneasy relationship

Tax departments and the real estate industry have always had an uneasy relationship. Tax departments feel that most players in the industry enter into extremely complicated transactions with the sole intention of avoiding or minimising tax payments, while the industry thinks the tax department needs to understand how joint development agreements and revenue sharing agreements work.

Under the GST law as it exists at present, pre-sale activities such as composite works contracts and construction of complexes and the like are taxed at 18% and 12% respectively. What would be discussed in the November 9 meeting would be the levying of tax on the sale of real estate properties. At present, the combined effect of VAT, service tax, stamp duty and registration charges results in a net tax impact ranging between 11% and 15% of the price of the property depending on the state where it is located.

Since prices in the real estate sector are not uniform, it would be almost impossible to have a single GST rate for all real estate transactions. Going by trends in the short history of GST, one can expect low-cost housing to get into the 5% bracket, reasonable housing to be in the 18% bracket and luxury housing to be in the 28% bracket, perhaps with an additional cess.

The prices of properties could decide which segment they get bracketed in. However, if the impact of GST has to be passed on to buyers, it is critical that the blockage of credit on works contract service that is prevalent right now for properties to be leased is removed. It is also necessary that no new restrictions are imposed on availing credit.

The real estate industry would be worried if they feel that the sole purpose of bringing the industry under GST is to curb tax evasion. If that’s the sole intent, it will influence the drafting of the finer details of the law, and one can expect needless restrictions and conditions that could vitiate the purpose of the exercise.

While the decision to initiate a discussion on bringing the real estate industry under GST is welcome, the fine print in the law needs to be thought through in minute detail. Considering the amount of work the government has to do to bring in some stability to the GST regime, the last thing they would want is to have to decipher transfer and revenue sharing agreements that are even more complicated than they are now.

(The writer is a Bengaluru-based tax expert)

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