G Natarajan’s Demystifying GST for the Construction Industry (Oakbridge, ₹795) is intended as a comprehensive user’s manual for developers, sub-contractors, commercial property buyers, homebuyers and others in India’s real estate and construction sector.
But for those who aren’t direct participants in the sector, the book is an educative read on how taxes that a make a straight-forward start in India, over time, evolve into labyrinthine levies that mystify taxpayers and require the combined efforts of legions of chartered accountants, tax practitioners and tribunals to interpret them.
Instead of diving into GST from the word go, Natarajan, a former central excise official and legal tax practitioner for over a decade, divides his narrative into two parts. The first is a historical perspective on how construction activities came to be taxed in their current (complicated) form, while the second explains modalities of the GST regime. A third section is on circulars and notifications.
The real estate and construction sector has always been a money-spinning cog in the Indian economy, and governments since the Independence era have keenly pursued creative ways to tax it. After attempts by State governments since the 1940s to tax construction activities as ‘deemed sale of goods’, the advent of the service tax era in the 1990s laid the foundation for a comprehensive indirect tax regime for the sector.
When service tax was first applied in 2004, it was a simple levy of 10.2 per cent on construction services for buildings intended for commercial purposes. Later realisation that construction activities often entail the transfer of land — which, being immovable property, cannot be taxed as a service — led to the concept of an ‘abatement’. With the government getting more ambitious and sweeping residential complexes (of more than 12 units) into the service tax purview in 2005, the complications multiplied manifold. The tax system now had to account for varied models of residential project development, including joint developments. The 2007-08 Union Budget dropped a bombshell by seeking to ‘introduce’ a service tax and a composition scheme for works contracts. With the new scheme proposing a 2.06 per cent tax on ‘works contracts’ against the 4.08 per cent already levied on construction services, the floodgates were opened to a hectic round of litigation between the taxman and the construction industry; eventually laid to rest by the Supreme Court in a case involving L&T. The infamous negative list for the levy of service tax in the 2012-13 Budget helped rationalise taxes for the construction industry, but exemptions were tagged on over time.
With service tax replaced by the GST in 2017, sharper definitions of what constituted as supply of services or composite services in the construction context emerged. The sector was subjected to two rates of tax — a 12 per cent effective rate (after abatement) where transfer of land was involved, and an 18 per cent rate for works contracts and other construction. While this would have been a relatively simple structure to adhere to, both the government and the construction lobby refused to leave it well alone.
Over 2017 and 2018, the Centre made five tweaks to the above rates to usher in new slabs of 5 per cent and 8 per cent for specific housing schemes. The construction industry, complaining vociferously of the high tax incidence aggravating the sector’s recession, nudged the government to change rates again in April 2019. This muddied the waters a fair bit, with the Centre slashing GST rates for residential apartments but snatching away the input tax credit. As things stand, affordable homes carry a flat 1 per cent GST and other homes 5 per cent GST (without input credit) while commercial construction is subject to 12 per cent. Ongoing projects in April 2019 could opt for either old or new rates. The author notes that the transition from a GST with input tax credit to a flat rate has spawned a host of new grey areas for both developers and landowners. At the end, one is left with a feeling of empathy for small businesses which need to cope with such frequent twists and turns in the tax systemwhile being castigated for non-compliance. The author admits that it took him, a practising tax professional for 25 years, many days of study to unravel the maze of amendments relating to GST on the construction industry. If the GST, as it applies to just one sector, is so complex as to merit an entire book, it is clearly quite far from being a Good and Simple Tax.
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