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Real estate under GST: A great weapon in the war against black money

GST leaves a digital trail of transactions that serves as a deterrent for non-reporting or under-reporting the sale value of land or building

Dhananjay Singh 

Real estate under GST: A great weapon in the war against black money

According to a report on the sector by (IBEF), a trust established by the Department of Commerce under the Ministry of Commerce and Industry, the Indian market is expected to touch $180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP). Real estate's share in India’s GDP is estimated to increase to about 13 per cent by 2028. The sector is a major source of employment, especially for those belonging to the weaker sections of our society. But it is showing sub-optimal growth due to large-scale penetration of the black economy. Various research studies, including those by (NIPFP) and also the White Paper on tabled in the on 21 May 2012, have repeatedly pointed to the vicious link between sector and the black economy in India.

Containing black economy is a stated public policy objective, which the State strives to achieve, as it is eating into the vitals of the socio-economic & political fibre of the country. Poor governance (resulting from corruption) increases costs. Therefore, it becomes imperative for the government to bring in comprehensive reforms in to make the campaign against successful.

It is hard to value real estate, which makes it suited for undervaluation and an ideal investment for black savings. Understating of the value of immovable properties in the transfer deed is a major way of generating black income. The difference between the market value and the declared value of properties at the time of registration gives the extent of under-reported income.

The current regime of taxation on land and incentivises widespread tax evasion, and generation and use of At present, there is a plethora of taxes levied by different authorities on land and (See Table: Important taxes & charges on land & post 1 July 2017) which leads to cascading of taxes thereby increasing the distortionary impact of taxes on efficiency and productivity of the market.

The present regime of transfer, registration and stamp duties, all being transaction-centric taxes, are amenable to inclusion within the base as is also a transactions tax. Inclusion of within the fold will help in minimising the overall tax burden in absolute rupee terms.

This will, in turn, enhance the elasticity and buoyancy of India’s indirect tax system, because the audit trail in will bring a greater proportion of transactions into the tax net, augmenting the revenue collection. leaves a digital trail of transactions, which becomes a disincentive and deterrent for non-reporting or under-reporting of the sale value of the land or building, and thereby reduces the shadow economy.

Important taxes & charges on land & post 1 July 2017
Name of tax Taxing jurisdiction
1 (Indirect tax) Both Centre & States

Stamp duty

State Govt
3 Registration charges State Govt
4 Property tax State Govt
5 Municipal tax Local Body
6 TDR & Fungible FSI cost Local Body
7 Staircase premium Local Body
8 Land revenue & scrutiny fees Local Body
9 Development charges Local Body
10 Labour cess State Govt
11 Estate duty State Govt
Source: Government websites & Naredco

GST, because of its concurrent taxing jurisdiction of Centre and States over a common base and the seamless transfer of input tax credit facility -- which was hitherto blocked due to separate taxing jurisdiction of Centre and states -- provides the right incentive for key supply-side stakeholders such as developers and brokers to bring their transactions into the formal tax net. This may considerably reduce speculative activity in the sector due to pumping of illegally gotten wealth, which had spiralled up the prices in detriment to the interest of end buyers. Thus, the inclusion of in the base will be a definite step towards attacking one of the major root causes of creation of black economy using in India.

In a step forward, the Council is expected to discuss the inclusion of within the ambit of in its forthcoming meetings. The spirit of co-operative federalism needs to be leveraged to convince the reluctant States about the various long-term benefits of including in base. In order to reassure the states of the continued access to their earlier kitty of revenue accruing from registration or stamp duties, the 12 per cent (including land portion) levied on construction of a complex, building, civil structure intended for sale to a buyer, partly or wholly can be increased proportionately, while scrapping provisions and subsuming it into This is expected to increase the velocity of transactions, unlike under regime, where duty becomes payable every time a document or a deed is required to be executed. Relevant amendments need to be done in the Seventh Schedule of the Constitution. We need to amend the definition of goods in the Sale of Goods Act, the CGST Act and the various SGST/UTGST statutes by including land and in the definition of goods, as in the case of some countries such as Malaysia.

The (Regulation & Development) Act, 2016 (RERA) brings in transparency and greater competition among various market participants in the market. Developing a transparent market by including land and buildings in the base will help break the unholy nexus between market and black money, and also boost the economy as the sector has spill-over effects in about 200 industries such as steel, and cement. Housing sector uses numerous inputs, and eliminating taxes on intermediate products and business transactions through seamless flow of input tax credit will boost the efficiency and productivity of the housing industry.

alongwith can help in the consolidation of the sector leading to robust and sustainable growth. The resulting increase in transparency is expected to boost trust levels, especially of the retail-level end-user buyer who perceives herself to have been short-changed by the developers of under-construction residential projects (with milestone-based payment) because of inordinate delays in offering possession. Rationalising the tax structure by subsuming the different indirect taxes on affordable housing under will also help achieve the government’s mission of ‘Housing for all by 2022’.

By bringing land and under GST, the economic fundamentals of India’s economy would be further strengthened as the real sector comprising consumption and production will get a leg up due to enhanced productivity, transparency and competition following the comprehensive application of in the sector.

The writer is an Assistant Commissioner of the Indian Revenue Service ( Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

First Published: Wed, January 31 2018. 12:50 IST