Realty bites

Addressing a gathering at Harvard University, Finance Minister Arun Jaitley recently said that the one sector in India where maximum amount of tax evasion and cash generation takes place is the real estate industry, which is outside the ambit of the Goods and Services Tax. He added that since some States have been pressing for bringing realty under GST, the November 9 meeting of the GST Council would discuss the issue.

Jaitley concluded that bringing real estate under GST would result in consumers paying one final tax on property. The latter may be only partially true since stamp duties levied by the States have not been subsumed into GST.

Tax departments and the real estate industry have always had an uneasy relationship. The taxmen feel that most of the players in the industry enter into extremely complicated transactions with the sole intention of avoiding /minimising tax while the industry is the the opinion that that the tax department needs to get trained on how joint development agreements and revenue sharing agreements work.

Under GST law, pre-sale activities such as composite works contracts and construction of complexes and the like are taxed at 18 per cent and 12 per cent, respectively. What would be discussed in the November 9 meeting would be to levy a 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 of 11-15 per cent.

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 noticed in the short history of GST in India, one can expect low-cost housing to get into the 5 per cent bracket, reasonable housing to be in the 18 per cent bracket and luxury housing to be in the 28 per cent bracket. Prices of properties could decide which segment gets bracketed in. One should not be surprised if a compensation cess is also levied on luxury housing.

But, 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 on availing credit are imposed.

The real estate industry could be worried that the Government is bring the industry under GST only because they of the opinion that there is maximum amount of tax evasion and cash generation in the industry. If this thought process is used while drafting the finer details of the law, one can expect a lot of needless restrictions and conditions which could vitiate the entire purpose of bringing the sector under GST.

While the decision to initiate a discussion on bringing the real estate industry under GST is to be welcomed, the fine print in the law needs to be thought through in minute detail considering the touchy nature of the subject and the ambivalent relationship between the tax payer and the tax receiver. Considering the amount of work the Government has to bring some stability to the GST law, the last thing they would want would be to try and decipher transfer and revenue sharing agreements that do not meet the definition of supply.

The real estate industry is still coming to grips with demonetisation, GST on construction activities and the need for additional disclosures under the Real Estate Regulation Act. They would only be hoping that the GST on post-construction sales gives them some reason to smile.

The writer is a chartered accountant

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