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 taxand Service tax on construction activity and Stamp duty on the entire salevalue of property. 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 leviescurrently applicable to construction and allied activities should be subsumedinto 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 asituation, Stamp duties and registration chargesshould ideally be subsumed intothe 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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