Mains Paper 3: Economy
Prelims level: GST
Mains level: Composition scheme in GST
• At the 31st meeting of the Goods and Services Tax (GST) Council held in December, it was decided to refer the matter of taxation of residential property to the Law and Fitment Committee.
• Ever since the inception of GST, there has been extensive debate on what the appropriate GST rate for residential property should be.
• As things stand, residential property sold before getting the completion certificate attracts an effective rate of 12% GST (18% GST less abatement of one-third towards the value of land).
• The effective GST rate for affordable housing is 8%. The developer is entitled to claim credit for input GST incurred on various goods and services used in constructing such property.
• However, property sold after getting the completion certificate is not liable to GST, and is subject to only stamp duty.
• There has been a lot of ambiguity and miscommunication around the effective tax cost embedded in residential property, before and after GST was rolled out.
• The government and consumers believe that developers have not passed on the GST benefits to consumers in many cases, the developers believe that there is little or no benefit to be passed on.
• With an effective service tax of 4.5% (15% on 30% of the property value), value-added tax (VAT) generally between 1% and 3%, and blocked input taxes of VAT and excise on the construction material.
• The total indirect tax cost on residential property generally used to range between 6% and 11%.
• With 12% effective GST, the cost has gone up in many cases, contrary to the popular perception, especially among consumers.
• However, to reduce the GST burden on consumers, the council is now believed to be evaluating a composition scheme of 5% without any input tax credit, along the lines of restaurants.
Analysing this context
• Depending on the mix of construction cost and land value in the cost of a property, input tax blockage could exceed 6-7% for many projects, taking the overall tax incidence back to 12% (or more) of the total value of the property.
• Therefore, the new composition scheme may or may not result in overall tax cost reduction, depending on these factors.
• The impact would vary across projects, in general, the tax incidence (in percentage terms) would be more where the value of land is less compared to other places.
• Most developers will have no choice but to increase the base price to recover the additional input tax cost.
• In the absence of a clear understanding/visibility around these input taxes, the consumers may again feel short-changed.
• This, in turn, could lead to more consumers reaching out to the anti-profiteering authority, resulting in unwarranted investigations and litigation.
• The problem would be aggravated for ongoing projects, as the developers would need to re-compute the GST impact to be adjusted in the price, in view of the anti-profiteering provisions.
• Also, in cases where the contracts with consumers are silent on input taxes, there could be potential disputes about whether the increase in input tax cost can be recovered from the consumers who have already booked the property before implementation of the composition scheme.
Importance of input tax credit
• Denial of input tax credit would lead to a break in the GST chain, which is the core of the GST system.
• It could also induce cash/unreported purchases, to minimize the tax cost.
• Real estate has historically been a rather unorganized sector and a full GST levy with input tax credit was believed to be an important catalyst for its formalisation.
• Therefore, a composition scheme with no input tax credit may turn out to be a retrograde step.
• Even if a composition scheme is introduced, charges such as preferential location charges (PLC) may continue to attract full GST with input tax credit.
• This would add to the complications of computing eligible input tax credits (attributable to PLC) and could also lead to disputes with the authorities over the computation mechanism.
Selecting the right approach
• Perhaps a better approach would be to reduce the prevailing GST rate on residential property.
• For instance, the 18% rate may be reduced to 12%, making the effective rate 8%, with one-third abatement towards the value of land.
• Alternatively, a higher abatement can be provided towards the value of the land, depending on the per-square-foot price being charged for the property.
• This would affect the GST to be charged by the developer on the invoice/ demand notice issued to the consumer.
• It would be rather easy for the latter to verify that the benefit of rate reduction/increase in abatement has been duly passed on.
• Also, to curb unwarranted speculation and disputes, it is in the interest of both the government and developers to spread more awareness about the manner of computing overall tax cost (both before and after GST).
• Due emphasis should be given to the fact that in the erstwhile regime, service tax, VAT, and excise duty used to apply on different components of the property value and, hence, a simple mathematical addition of different tax percentages will yield an incorrect picture.
• Instead of introducing a new composition scheme, the industry and consumers would really benefit if the GST Council is able to eliminate the dual levy of stamp duty and GST on real estate.
Q.1) Consider the following taxes:
1. Corporation tax
2. Customs duty
3. Wealth tax
4. Excise duty
Which of these is/are indirect taxes?
(a) 1 only
(b) 2 and 4 only
(c) 1 and 3 only
(d) 2 and 3 only
Correct Answer: B
Q.1) How the industry would be benefitted if the GST Council eliminates the levy of stamp duty and GST on real estate?