GST has seen a mixed reaction from the real estate sector as it’s is still grappling to develop a complete understanding of the sector.
The Goods and Services Tax (GST)—India’s biggest tax reform post-independence—was implemented on 1 July 2017. It seeks to transform the Indian economy by subsuming a host of indirect taxes charged at varied rates by the centre and states, thereby bringing uniformity in taxation across the country.
What was expected to create a massive upheaval in Indian commerce, GST has started to show signs of acceptance across India.
Government estimates show a growth of close to 100% in registrations under GST as against previous tax regime, claiming over 11 million business registrations in the first year itself.
There are different tax computation methods for different projects/phases of the same project. Further, there is ineligibility of refund to developers under the inverted duty structure, considering inputs are procured at a higher rate of tax whereas output is charged at a lower tax rate.
Some GST impacts of GST on real estate:
Currently there is a lack of clarity among developers on the exact implications of GST. Developers feel that the exact impact will be understood only after a thorough analysis of the implications on each input cost (in form of labour and raw material, namely steel, cement, bricks, etc.)
With regard to such raw material inputs — the challenge lies in estimating the cost of these commodities over the entire life cycle of the project. Since the purchase of these supplies is linked to construction progress it is difficult for developers to estimate upfront the costs and input tax credit received for the same.
There is a complexity of being on the right side of the NAA (National Anti-profiteering Authority) by passing on the benefit of input tax credit to the customer, despite an increase in any other costs.
There is no specific mechanism provided for offsetting any other increase in costs against the benefits of input tax credit.
Tax treatment of ongoing projects which were earlier under the VAT and service tax regime and will now migrate to GST is complex. It is not just a simple change in an excel formula and involves a much deeper understanding of how input tax credit is to be calculated.
The GST law still has to mature and compliance related processes need to be refined further.
It is important that the government issue timely clarifications to ensure major concerns, which need clarity once and for all are addressed.
GST which represents unified and simplified taxation policies of the country, will add to India’s attractiveness as an investment destination in the long run.