Will the GST Issues be Resolved this 2019?

The GST Council held it’s last meeting on January 10, this year. But it did not reach any conclusions for resolving the long-standing issues of the developers and buyers, the high GST rate being the prominent one. A GoM has been formed for addressing these problems, which comprises the Goa’s Minister of Panchayat and the Finance Ministers of Uttar Pradesh, Karnataka, Kerala, Punjab and Maharashtra.

Rationalization of the existing GST rate will be addressed if possible, by a panel of Ministers led by the Deputy Chief Minister of Gujarat, apart from constructing a composition scheme as an extension of GST to the consumer-based industries. Back on January 10, the GST Council held a meeting that was unable to reach an agreement on the varying matters of the Real Estate Sector. A separate GoM (Group of Ministers) will be handling the affairs.

Whether or not the existing high rate of GST at 12% will diminish to a flat 5%, rests with the decision of the Group of Ministers (GoM).

What Glitters is Not Gold

According to the tax experts, the composition schemes are apparently attractive but not fruitful to the same extent if looked at with a deeper insight. Which is better? A 5% GST rate without any advantage of ITC (Input Tax Credit) or the standard 12% accompanied by full ITC benefit.

Till now, the GST remains at 18%, which finally works out to 12% after the deduction of 6% as land value, in the case of premium residential properties while the affordable housing charges a relatively effective lower rate of 8%, for both the ready-to-move-in units without completion certificate and under-construction property. The original rate is 12% that becomes 8% excluding the 4% as the abatement for the land.

But if you are buying a property, which has been issued a completion certificate at the time of your purchase, then you are not needed to shell out on GST. As analysed by a realty professional, the further reduction in 8% GST for affordable housing would be helpful only if it comes with ITC (Input Tax Credit) benefit. Otherwise, the lowered 5% rate will escalate the sale prices, thereby increasing the apartment prices in most of the middle and low-income projects. This might affect the scheme of Affordable Housing by the Government.

The inclusion of the ITC (Input Tax Credit) benefit with the reduced rate of GST at 5% on the residential properties under construction, is anticipated by the builders.

Defining the Composition Scheme

Composition Scheme is not a new concept to be brought under the dominion of GST. It even existed during the era of Service Tax, VAT and other tax laws. Under this scheme, a ‘composite’ tax liability has to be dispensed by the small taxpayers at a fixed percentage of their sales/ turnover. The system aims at lessening the pressure of tax on small vendors and to ensure that it is less binding on them.

What Positivity Would be Brought About by the Composition Scheme?

The implementation of the Composition Scheme is hoped to dwindle property prices with the tax rate getting lowered. Consequently, the degree of certainty related to the GST compliance will also rise.

The best part is that the Composition Scheme doesn’t allow the taxpayer to collect tax for the inputs used, from the buyers. Therefore, if the aforementioned scheme comes into effect then the buyers will get rid of having to pay the extra amount charged by the builder on behalf of the GST paid by the latter for the raw materials.

But the effect of the scheme wouldn’t be pleasant for the non-AC restaurants that charge the customers with 5% GST, according to the experts.

On the other hand, a reduction in the GST rate without any ITC (Input Tax Credit) to the developers will increase the burden on the home buyers altogether due to the absence of the benefit on the payment of raw material taxes. The charge of input tax cost on the builder will inevitably fall on the buyer.

The GST attracted by capital goods, construction material and input services is 18% at present. The blockage of the credit chain will include the amount paid as GST for the inward supplies within the overall cost, thereby increasing the construction cost. That is not at all desired.

In addition, the builder not being able to recover the tax amount from the buyer under the Composition Scheme might include it in the property cost.

How the Perfect Composition Scheme Should Be?

The ultimate Composition Scheme will fix the GST rate only after considering the increased cost due to the blockage of ITC and the amount incorporated in the property price by the developer for being unable to recover it from the buyers.

The bottom line is, whichever way the scheme is devised, it should minimize the overall tax burden on the consumers.

The scheme should have the provision for optional but not obligatory tax payment by the builder.

Has GST Proved to be a Relief or Burden?

26 cesses, 17 State and Central taxes were replaced by GST in 2017. GST was expected to free the taxpayer from multiple levies, compliance burden and unwarranted litigation.

The GST charged on the under-construction properties turned out as a serious obstacle to the realty growth in 2018. Many buyers literally suspended their decision of purchasing property with the expectation of the reduction of GST rate late in December.

As reminded by the Chairman of the country’s leading Real Estate consultant, the moderate growth in the sales figures witnessed by the industry is attributed to the sale of ready-to-move-in units. Firstly, this category of housing does not charge GST. Secondly, the unending delays in project completion have diverted buyers from the purchase of homes in under-construction projects.

Any property that has acquired completion certificate during its purchase, won’t demand any GST charge from the buyer. On the other hand, the Commercial Real Estate charges GST at 18% without any benefit of ITC (Input Tax Credit). This has messed up the buyers’ minds, thereby making them postpone their purchase decisions. As a result, inventory has piled-up leaving the market in distress.

No GST is levied on real estate purchases where completion certificate was issued at the time of sale. An 18% GST is imposed on commercial real estate with no input tax credit being available. All this has created confusion in the minds of buyers and forced them to delay their buying decisions, leading to inventory pile-up and distress in the market.

GST Requires to Address the following Issues:

  • Taxability of TDRs (Transfer of Development Rights)
  • Ambiguity on the treatment of JDAs (Joint Development Agreement)
  • Limitation on credit availability
  • Allowance of centralised registration

According to the Finance Ministry’s statement issued the previous week, the Group of Ministers (GoM) is anticipated to study the different facets of GST on TDR (Transfer of Development Rights) and Development Rights in a Joint Agreement. The legality of exclusion/ inclusion of land or any other component would be examined and the valuation mechanism to be suggested by the panel.

An outcome of the GST Council Meeting

The industry’s long-standing demand of bringing down GST rate to 5% was not generally agreed in the 32nd meeting of the GST Council.

Two proposals were kept in front of the Council:

1. Maintaining a fixed GST rate at 12% with the availability of full ITC to the developers. This would remove the difference between the GST charged for affordable and normally priced homes, respectively.

2. If the builder has purchased around 80% of his raw materials from suppliers registered with GST then the rate imposed on the property under construction will be 5% and that too, without the benefit of ITC.

As has been reported by the Minister of Finance, a seven-member GoM (Group of Ministers) will be shaped for bringing harmony to the different opinions on the Real Estate affairs. Thus, the demands of the builders and home buyers will be addressed by this team in the next meeting of the Council rather than by the 2019 Budget.

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