Bottom Line: Some ground realities about GST in Indian real estate suggest that beyond the political overtones the economics of the taxation structure does not indicate a smooth transition.
Land is a state subject and stamp duty on the registration of property is a major source of revenue
Combining present rate of 12% GST plus 5-7% stamp duty would make housing beyond the reach of almost everyone in India
Offering a slab of 5% and 12% for low-cost and other housing projects might sound buyer friendly, but revenue sharing between the Centre and the States at this rate would be bone of contention
It is still not clear how real estate inclusion in GST would check tax evasion from the property market
The Finance Minister Arun Jaitley nevertheless has announced that the issue of bringing real estate under the GST’s ambit is being mulled because it is one sector where maximum amount of tax evasion and cash generation takes place.
“The one sector in India where maximum amount of tax evasion and cash generation takes place and which is still outside the GST is real estate. Some of the states have been pressing for it. I personally believe that there is a strong case to bring real estate into the GST,” Jaitley said.
The real estate industry stakeholders are elated with such a prospect since the tax slab being discussed at 5% & 12% is lower than the present taxation. Niranjan Hiranandani, President, NAREDCO said the move would benefit the consumers who will only have to pay one ‘final tax’ on the whole product. This is obviously a good thing to happen, and the real estate industry will welcome the move.
“From the perspective of the homebuyer, not only will RERA bring in transparency, but bringing real estate within the ambit of GST should also make it less of a burden vis-à-vis taxes payable at the time of buying the home. Not only will this create positive sentiment but it should also boost actual sales,” said Hiranandani.
CREDAI National President, Jaxay Shah echoed the similar sentiments when he said that CREDAI recognizes earnestness in eradicating the parallel economy as a positive and defining feature of the policies of the government.
“GST is being levied on construction services already, while land is subject to stamp duty by states at rates varying between 5-8%. CREDAI believes that the burden on home buyers needs to be kept to a minimum, especially at this juncture,” said Shah.
However, such optimistic overtones are reflection of an expected and Finance Minister’s announced assessment of GST in real estate falling in 5% and 12% slab. There is no denying that if implemented with this rate of GST, the developers as well as homebuyers have every reason to rejoice.
However, it is to be seen how the Finance Minister takes the states on board to create a consensus. Will the majority of states, especially those where real estate transactions are major source of revenue, be ready to compromise with the higher taxation through stamp duty and property registration?
It is highly unlikely as already some of the states, most notably the BJP ruled Maharashtra has raised its objections. The Maharashtra Government has opposed the inclusion of real estate in GST and does not want any decision in this matter to be taken in a hurry. Maharashtra Government has cited that it annually earns over INR 20,000 crore through stamp duty and registration charges.
The real estate industry stakeholders are watching the developments closely. They are conscious of the fact that if the real estate is brought under the GST ambit to reduce the multiple taxation and lessen overall tax burden of the homebuyers, they would be the real beneficiary in the final analysis.
However, it would not be as easy as making a public statement since it is a question of compensating the states with major source of revenue. And if the real estate GST is finalized above 12% then already unaffordable property market will hit the dead end for both the buyers and the developers.
By: Ravi Sinha