Aryan, gasping and panting, stumbled inside the office of his friend, Kushal.
“Hey, Aryan! What a surprise – ” said Kushal, a CA by profession, who began to greet Aryan, but stopped short at the harried and hassled look on his friend’s face. “Is everything fine, Aaryan?”
“Nothing’s fine!” Aaryan sounded agitated as he plonked himself down on the chair. “The word ‘fine’ doesn’t fit aptly for us businessmen! But yes, if we talk about punishable “Fines”, they are made for us!” he finished with sarcasm.
“C’mon, buddy, stop talking in riddles and cut to the chase!” Kushal urged.
“I can define all my difficulties in one word,” Aaryan said, “and that is : GST!”
“GST? Your difficulty?” Kushal said, looking perplexed.
“Precisely!” Aaryan went on frantically, “You see, I am a Real Estate Builder. I have been paying my Service Tax, VAT and filing all those returns on time. For us Builders, we enjoyed a whole gamut of relaxations in the form of Service Tax Abatements, Composition schemes under Value Added Tax with a meagre VAT of 5%. The Construction Business was going ever so smoothly until suddenly – dark clouds of GST loomed over us and, Voila! We are robbed of all the benefits!”
“Wait, wait,” Kushal intervened with a curious smile, “C’mon, Aaryan, you are under a severe delusion! GST is your friend and not your foe! Tell me, have you attended any GST seminars of late?”
Aaryan shook his head, “Umm…well, the last one was 3 months ago!”
“Ah…there lies your folly, my dear friend!” Kushal remarked, “Ignorance invites Pain! Now brace yourselves, I will just give you a gist of actual impact of GST on Real Estate Sectors. And believe me, you’ll be much relieved when you hear them!”
“I am all ears,” Aaryan said, leaning forward eagerly.
Kushal said, “Tell me, do you have proper invoices and bills maintained for raw materials you buy like: Cement, Bricks, Steel and other such construction materials? And do these documents mention the tax amounts? ”
Aaryan nodded but said uncertainly, “But I am Builder. Under VAT laws, I was unable to utilize the Input Tax Credit of Purchases. This won’t –”
“My dear friend, you will get the Input Tax Credit of these purchases regardless of VAT laws and even when one might not be registered under Excise or VAT!” Kushal said brightly.
“What? Please elaborate.”
“To transfer the existing credits into the GST regime, the condition is such that credit must be admissible in the GST regime. Therefore, builders should be able to transfer the following credits to the GST regime:
- Credit of Service Tax: The same must be properly reflected in the last service tax Return and documentation must be in place to establish the same. Further, service tax credit pertaining to inputs in stock and work-in-progress can also be availed.
- Excise Duty/ CVD: Currently builders are not availing the credit of excise duty. Now, the builders need to ascertain the value of stock as on the appointed day (the day when GST gets implemented) and based on the availability of the invoice/documents, credit can be availed.
- VAT/ SAD: Similarly, if a builder is not availing the credit of VAT/SAD currently due to restriction in the state VAT law or due to being in the composition scheme, then the credit can be availed based on the ascertainment of stock as on appointed day. But if VAT credit is being availed under the VAT laws, any Input Tax Credit must be carried forwarded in the returns.”
Aaryan was silent as he absorbed this delightful knowledge and suddenly burst forth : “Wow! This is great! If there is any ITC carried forwarded in my Service Tax Returns or VAT returns, I can avail them in GST. And even if I was not availing VAT or Excise (due to restriction in earlier laws), I can equally avail them if I have the documents and value my stocks! Right?”
“Right you are!” Kushal agreed, “Of course, there are technical difficulties regarding valuation and such, but in due course, they too will be resolved.”
“But I have a question,” Aaryan demurred, “What if I have no documents or invoices or bills?” “Good question.” said Kushal and continued, “See, Businesspersons – like construction & Real Estate, SSI Dealers or traders – not falling under Excise can claim the 100% credits of Excise if proper documents/invoices are there and stocks are valued as I said above. But in the absence of such documents and invoices:
- Input Tax Credit of Excise will be limited to 60% of CGST if these stocks come under GST @ 18 % or above Tax bracket, or
- 40% of CGST if these stocks come below 18 % Tax bracket of GST.
“That’s quite a relief!” Aaryan nodded, “But I heard the Real Estate Business will be taxed at 12% under GST regime. You see, I am paying Service Tax after considerable abatements and only 5% VAT under composition scheme. Compared to these, the 12 % GST rate seems somewhat Taxing.”
Kushal smiled: “You are missing the “Net-effective Tax” benefit.”
“Explain in detail, please.”
Effective Tax Liability is Lower for Builders
Kushal went on: “For Builders/Real Estate Developers, the actual tax effect will be lower than the existing one mainly due to the input tax credit on raw materials that builders get against payment of taxes on inputs like steel, cement, bricks and others. Consequently, from the economic point of view, the overall project cost of Construction will come down. Homes would become cheaper.
There are a lot of products and raw materials that developers procure/purchase for construction of buildings on which there is double taxation at present. The cost they bear for these come to around 25 percent of the cost of materials they are buying. So, with the GST rate, between 12% and 18%, it will reduce the cost of production for developers. This will be good for buyers, as developers will be able to pass on a part of the benefit to them. Moreover, since buyers are not liable to pay any GST for the purchase of ready-to-move-in properties, the impact of GST on buyers of resale properties is likely to be very little.
The GST tax regime will stop the unwanted practice of double taxation, which adversely impacts real estate and other sectors, given their cascading effect and inflated prices for end users. With GST enforcing transparent rules across all arenas, this will be a blessing in disguise for Real Estate Developers.”
“That’s quite a profitable perspective,” Aaryan agreed.
“And speaking of Profitable perspective, there is also “Anti-profiteering Measures” in GST regime:
Since a builder will be able to take the credit of goods lying in stock, the tax cost would decrease. This additional benefit accruing to the builders is expected to be passed on to the end consumer by way of reduction in prices etc. A separate authority will be formed in the GST regime to monitor the non-compliance of the anti-profiteering matters which could have an adverse impact on the entire construction industry whose pricing is more market dependent than other factors. Therefore, it is imperative for the builders to establish the passing on of the GST benefit to its consumers.”
“One more issue. We often face problems regarding obtaining of completion certificate,” Aryan said, “Under the Service Tax laws, if the entire consideration was paid by the buyer after “completion certificate”, then no service tax was there. The problem was, there are numerous practical difficulties for obtaining such certificate. It even takes years, sometimes. And thus, the buyer suffers.”
Completion Certificate is not a Compulsory Criteria
“Now no more hassles, buddy,” Kushal remarked, “In GST, the provisions are similar to that of service Tax. But, as a major relief, it is also stated that even if the completion certificate is not received, GST may not be levied after the first occupancy of the premises. This would provide relief to builders as well as buyers.”
“That sounds very good, indeed.” said Aaryan. “Tell me the other impacts of GST upon us builders.”
“There are other advantages as well as disadvantages in GST regime.” Kushal said, “These are as follows:
GST on Stock Transfers
Transfer of inputs/ capital equipments from one site to another is quite common in this sector. Therefore, builders operating from multiple locations in different states would be required to pay GST on stock/ Assets transferred from its premises in one state to its premises in another state. Further, in case builders are having multiple business verticals within the state and if a builder opts to take separate registration for each such business vertical, then GST needs to be paid for stock transfers even when made within the same state.
The Land Factor:
Since stamp duty is being paid, it is expected that the land component would be allowed as deduction in the valuation of real-estate transactions in the GST. However, the issues regarding the valuation of land claimed as a deduction could continue as a dispute. Currently, in the GST law, no clarity has been brought in as to the valuation of the land. However, it is expected that the same must be clarified by way of issuing a notification during the GST regime.
Time of Supply
Currently, many builders pay taxes on receipt basis (without complying with the point of taxation) in case of service tax i.e. tax is paid only once the amounts are received from the customers. However, in the GST regime, tax needs to be paid immediately on earliest of completion of service, raising of invoice or receipt of money from customers. This could have an impact and could cause blockage of working capital funds.
All in all, there are both pros and cons of GST upon the Real Estate sectors. However, in the long run, GST is expected to contribute significantly to the GDP of the country. If GST rules and regulations are taken with an optimistic spirit by the Builders, it will definitely usher an era of transparency and lucidity that will benefit not only the builders but also the buyers.