GST on real estate likely to be a lengthy journey

The Council discussed this issue earlier but various legal and practical issues have since come to the fore

Bringing real estate under the goods and services tax (GST) could take much longer than expected, even as finance ministers are slated to discuss the issue in Guwahati next month. 

Deliberations will have to be held at the meeting (due November 10) of the GST Council on whether only land will come under the new indirect tax or if stamp duty will also be included, a senior source in the Council told Business Standard.  

The other important issue is whether bringing in these two will require Constitutional amendments or only legislative changes in the respective Acts. “These issues will be discussed by the Council,” the source said.

The amendments might be required because the definition of goods in the Constitution does not include immovable property, he explained. ‘Goods’ have been defined under the Sale of Goods Act, 1930, to include every kind of movable property, including stocks, shares, crops, grass, and severable objects. To put a goods tax on land under the GST might, then, require a change in the definition.

Also, stamp duty and registration fees on property are the exclusive domain of states. If these are to be included in the GST, there might be a requirement for a Constitutional amendment. 

Stamp duty on property is regulated by a central law — The Indian Stamp Duty Act, 1899. However, it is collected by the states. In fact, states have the Constitutional right to make any changes to the Act and have their own sets of rules in this regard. 

Stamp duty charges vary, in the range of three to 10 per cent. Even in a particular state, these might vary from one locality to another. Maharashtra, Gujarat, Karnataka, Kerala, Rajasthan and Tamil Nadu have their own stamp duty laws.

Unlike amendments to Acts, a Constitutional amendment requires two-thirds of those present and voting in each house of Parliament to agree; also, a majority of the House must be present. In a disagreement, there is no provision for a joint sitting. And, in this case, ratification of at least half the state legislatures might be required. 

Abhishek Rastogi of Khaitan & Co agrees a stamp duty on property might require a Constitutional amendment, as it in the domain of states. There is also an option, that states declare nil duty and agree to bring it under GST. “But, why will states do that?” he asked. These issues will make subsuming stamp duty into GST unfeasible at this point. 

Sources said the pros and cons of bringing real estate under GST will have to be understood. “There are a lot of aspects,” said an official in the finance ministry. For instance, the expectation of consumers in bringing real estate into GST is to also merge stamp duty and registration under the tax. “Will states be willing to do that? It’s the income exclusively given to states,” he noted.

An option could be that without bringing stamp duty into this, you put a separate GST on land and on buildings. “That will be an additionality for the consumer,” he said.

The Council did discuss these issues earlier. “But, more angles to it have come to light. We will have to take these to the GST Council again and explain the pros and cons, as well as the legal and constitutional position,” he said.  

M S Mani of consultancy Deloitte said, “There is a need to arrive at a broad consensus between central and state governments on inclusion of the entire real estate sector in the GST framework.” This could be followed by initiation of the legislative processes required to make this a reality. 

“Subsuming stamp duties and registration charges, which are different across states, within the ambit of the GST would also be central to the achievement of this objective,” he said. 

Currently, petroleum, alcohol and real estate are outside the GST. While work contracts for under-construction houses are in GST, stamp duty and land are out of it. India is one of the few countries where sale of under-construction houses is so much in vogue. Generally, it is constructed houses that are sold in other parts of the world. 

Rastogi said the Council should, instead, address immediate problems relating to real estate in GST. One of the issues is that the GST on works contract gives a one-third abatement on the deemed value of land. This deemed value should be replaced with a circle rate, he said. 

Bringing petroleum under GST would not be as cumbersome constitutionally. This is because imposing of GST on petroleum would require consensus between state and Centre but does not require any legislative change. Petroleum is already included under GST but the Centre and states are free to impose the current taxes till the time they agree to impose the levy. 

Finance Minister Arun Jaitley had recently said at Harvard University, “The one sector in India where maximum tax evasion and cash generation takes place and which is still outside the GST is real estate. Some states have been pressing for it. I believe there is a strong case to bring real estate into GST. “Some states want it, some do not. There are two views. Therefore, by discussion, we would try to reach one view.”

PROBLEMS GALORE

• Deliberations will have to be held at the GST Council meet on whether only land will come under GST or if stamp duty will also be included
• The other important issue is whether bringing in these two will require Constitutional amendments or only legislative changes in the respective Acts
• The amendments might be required because the definition of goods in the Constitution does not include immovable property
• Stamp duty and registration fees on property are the exclusive domain of states
• Stamp duty charges vary, in the range of 3-10%. Even in a particular state, these might vary from one locality to another