New GST rules on real estate defeat the very purpose of the indirect tax

The absence of ITC will generate black money, as there will now be a tendency on the part of builders to pay for inputs such as cement and steel in cash

While lowering the goods and  services tax (GST) rates on under-construction houses would give much-needed  relief to the real estate sector, the GST Council's decision to do away with input tax credit  (ITC) will defeat the very purpose of the indirect tax regime.

Also, many of the components of real estate, including stamp duty, leasing, completed or ready-to-move-in houses remain outside the GST domain.

After failing to arrive at a consensus on Thursday, the GST Council on Sunday slashed the GST rate on under-construction houses priced above Rs 45 lakh to 5 per cent from 12 per cent. The new rate will be effective in April.

The Council also lowered GST rates on affordable housing to one per cent from 8 per cent. In both cases, the builders will not get ITC in the new rate structure.

The Council adopted a twin definition for affordable housing, based on carpet area and cost. In metro cities, affordable house will be treated those with carpet area of up to 60 sqm and priced below Rs 45 lakh. In non-metros, a bigger flat of up to 90 sq m would be considered affordable, with the cost cap unchanged at Rs 45 lakh.

Metro cities would include the Mumbai Metropolitan Region, National Capital Region (Delhi), Bengaluru, Kolkata, Hyderabad, and Chennai.

The definition does not consider the built-up or super built-up area, but the carpet area.

Affordable houses in metro cities would typically be 2-BHK flats, while those in non-metros could also be 3-BHK apartments, finance minister and Council chairman Arun Jaitley had said.

Developers say this decision can potentially reduce buyers’ payout by 4-6 per cent on the overall purchase price, depending upon the category.

The Council's decision was much sharper for the affordable category than what was recommended by the group of ministers constituted for this purpose. The panel, headed by Gujarat deputy chief minister Nitin Patel, had recommended 5 per cent GST for non-affordable housing and three per cent for affordable dwellings without ITC. Also, the threshold suggested by the committee for affordable housing was up to a value of Rs 35 lakh in metro cities.

The decision was also much more benign than what was suggested by West Bengal finance minister Amit Mitra. Ahead of the Council meeting, he had proposed seven per cent GST for houses valued at over Rs one crore. Mitra had suggested dropping the artificial distinction between metro and non-metro houses. This distinction has been done away with, so far as value of houses is concerned, but not in terms of size.

Diluting the war on black money

However, the Council resorted to the same strategy to the complaints that builders are not passing ITC to the consumers as it did in the case of restaurants. In early 2018, GST on restaurants was reduced to 5 per cent from 12-18 per cent earlier, but ITC was taken away.

In fact, Jaitley had referred to restaurants while explaining the new GST structure on real estate.

The issue remains that if builders or restaurant owners were not passing on the benefit of ITC to consumers, it should have been monitored by the national anti-profiteering authority (NAA), which was constituted for that very purpose.

When asked if that would not distort the GST structure, former Central Board of Excise and Customs (CBEC) chairman Sumit Dutt Majumder was emphatic it would.

The issue is that the absence of ITC will generate black money, as builders will now be more inclined to pay for inputs such as cement and steel in cash.  

To address the issue, the law review committee and fitment committee of GST Council would deliberate on putting out a detailed circular.

GoM had recommended that at least 80 per cent of inputs should be procured from organised dealers. The issue will be discussed at the next Council meeting, tentatively set for  March 15.

Niranjan Hiranandani, President of real estate body NAREDCO, says,"It is a fact that not getting ITC and cement, still being taxed at 28 per cent GST, will impact calculations of profitability. Calculation of ITC is a tough task, given that every expert seemed to have a different take."

Manju Yagnik, vice chairman of the real estate group Nahar, says developers currently claim ITC on various raw materials like cement and steel, bringing down their overall cost. "But now, in the absence of ITC and the existing financial crisis, there will be some amount of pressure on the developers," Yagnik adds.

Not an all-embracing law

The larger issue is that real estate has still not been entirely brought into GST yet.

First of all, stamp duty on land as well as at the time of registration remained outside GST. Besides, renting or leasing of real estate is out of GST. Also, there is no GST on the houses where completion certificate is given to buyers at the time of buying.

Constitutional amendments might be required to bring in stamp duty on land under GST. This is because the definition of goods in the Constitution does not include immovable property. '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 other items. To put a goods tax on land under the GST might then require a change in the definition.

Since land is out of GST, an abatement of one-third is given on GST on houses. The actual GST rate on non-affordable houses currently is at 18 per cent and on affordable housing at 12 per cent. Because one-third abatement is given, these in effect stand at 12 per cent and 8 per cent.

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

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 from three per cent to 10 per cent. Even in a particular state, they could 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 case there is disagreement, there is no provision for a joint sitting. And, in this case, ratification of at least half the state legislatures might be required.

M S Mani, partner Deloitte India, says," It is now necessary to focus  on getting the entire sector within the GST value chain, as stamp duties continue to be an additional cost for  the entire sector."

Hiranandani says in the initial stage, the real estate developer will have to bear the additional cost, while the industry waits full implementation of GST for real estate. "There are levies and cesses and different types of taxes payable in different markets (states), while the actual rates of stamp duty and registration have not been subsumed into a single tax and vary across states."

Yagnik says for the sake of homebuyers, the unattended spheres should be added under the spectrum of GST. “Currently, buyers have to pay 15-20 per cent extra for stamp duty, registration fee and other miscellaneous fees combined, depending on the state they are in," Yagnik adds.