INTRODUCTION Goods & Services Tax (GST) -( One Nation One Tax) GST (one hundred and twenty-second-122 constitutional amendment) bill has finally, been passed in the Lok sabha and the Rajya sabha.
It heralds the first significant step towards the indirect tax reform in India in the last thirty years What is GST?
It is a tax levied when a consumer buys a good or service. It is meant to be a single, single,
comprehensive tax that will subsume all the other smaller indirect taxes on consumption lik li ke ser ser vice vi ce tax tax, etc. etc. It is a sing single le tax tax on the supply supply of goo g oods ds and and ser ser vice vi ces, s, r i g ht fr om the manufactur anufacture er to the end consumer This is how it is done in most developed countries. More than 160 countries have implemented this system of taxation. GST does not tax or get into the specific commodities.
Mechanism
of
GST:
Stage 1
Let‘s consider a manufacturer of gears.
Let‘s say he buys raw material worth Rs 100, a sum that includes a tax of Rs 10.
With the raw materials, he manufactures a gear In the process of creating the gear, the manufacturer adds value to the materials he started out with.
Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (the gear) will then the n be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). This setoff is also called as input credit. This forms the crux of GST.
Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10). 10).
What is Input Credit (set off)? ―Input Tax Credit‖ is an aggregate total amount of tax paid by a registered dealer on the total purchases made by him within the State from other dealers. dealers. Salient features of Input tax credit: It can be adjusted against the tax payable by the purchasing dealer on his sales. It is available for purchase of goods made within the state by a registered dealer from another registered dealer. It is allowed for both manufacturers and traders Even for stock transfer/consignment transfer/branch transfer of goods out of the State, input tax paid in excess of 2% will be eligible for tax credit In case of common goods used for taxable goods and tax free goods, ITC is allowed proportionately to the extent the purchases are used for the purpose of taxable goods. Thus, credit relating to the goods used in manufacture of exempted goods has h as to be reversed.
Stage 2 The next stage is that of the good passing from the manufacturer to the wholesaler.
Mechanism
of
GST:
Stage 1
Let‘s consider a manufacturer of gears.
Let‘s say he buys raw material worth Rs 100, a sum that includes a tax of Rs 10.
With the raw materials, he manufactures a gear In the process of creating the gear, the manufacturer adds value to the materials he started out with.
Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (the gear) will then the n be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). This setoff is also called as input credit. This forms the crux of GST.
Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10). 10).
What is Input Credit (set off)? ―Input Tax Credit‖ is an aggregate total amount of tax paid by a registered dealer on the total purchases made by him within the State from other dealers. dealers. Salient features of Input tax credit: It can be adjusted against the tax payable by the purchasing dealer on his sales. It is available for purchase of goods made within the state by a registered dealer from another registered dealer. It is allowed for both manufacturers and traders Even for stock transfer/consignment transfer/branch transfer of goods out of the State, input tax paid in excess of 2% will be eligible for tax credit In case of common goods used for taxable goods and tax free goods, ITC is allowed proportionately to the extent the purchases are used for the purpose of taxable goods. Thus, credit relating to the goods used in manufacture of exempted goods has h as to be reversed.
Stage 2 The next stage is that of the good passing from the manufacturer to the wholesaler.
wholesa sale lerr purcha ur chase sess it i t for R s 130 , and adds on value value ( which i s basi basica cally lly his hi s The whole ‘margin’) of , say, Rs 20.
The gro gr oss value of the the good good he sells sells would then hen be R s 130 130 + 20 — or or a tot total al of of R s 150. A 10% tax on this amount will be Rs 15. Under GST, he can set set off the the tax on on his outp utput (R s 15) 15) agains againstt the tax on on his purchase urchased d
good good fro fr om the manufa nufact cture urerr (R s 13). 13). Thus, the ef fecti fecti ve G ST i ncid nci dence on the whole wholesa sale lerr i s only Rs R s 2 (15 ( 15 – 13). 13). Stage 3
In the final stage, a retailer buys bu ys the gear from the wholesaler.
value,, or mar gi n, of, say, say, R s 10. To his purchase price of Rs 150, he adds value The gro gr oss value of wha whatt he sells sells,, there herefo forr e, goe goes up to R s 150 150 + 10, 10, or or Rs R s 160. 160. The tax on this, at 10%, will wi ll be R s 16.
setti ng off this this tax (Rs (R s 16) 16) agains againstt the tax on on his purchase urchase fro fr om the whole holesa sale lerr (R s But by set
15), 15) , the r etai tai ler ler br i ngs ng s down down the the eff effe ecti cti ve G ST i ncid nci dence on him hi mself self to R e 1 (16 ( 16 – 15). 15). Thus, the tota totall G ST on the the enti entirr e value value chai chai n from the raw material/input suppliers ( who cannot claim any tax credit since they haven’t purchased anything themselves) through
16. the manufacturer, wholesaler and retailer is, R s 10 + 3 +2 + 1, or R s 16. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
Brief chronology of evolution of taxation regime in India:
GST was first recommended by the K elkar lk ar comm commi tte ttee task task force. f orce. A brief chronology outlining the major milestones on the proposal for introduction of GST in India is as follows:
YEAR 1986:
Jha Committee first introduced value value adde added d tax taxati ati on in i n I ndia. ndi a. This was called as MOD M ODVA VA T (mo (modifie if ied d VA T). T) . The foremost objective of MODVAT was: Removal of cascading burden, o Rationalization and, o
Avoiding double taxation. later . H owever ver C E N V A T was VA V A T levie levied d on on cent centrr al excise excise It was renamed as C E N V A T lat o
duties only. State level VAT/sales tax and interstate tax were not altered.
Salie Salient nt F eatures ures of VAT VA T and and CE NV A T
VAT reduces tax erosion, because a seller pays VAT on his sales but gets g ets refund of VAT nput C r edi t) . paid by him on previous purchase ( I nput A retailer pays VAT, but is refunded (through the mechanism of (input credit) VAT paid by him on goods purchased by him from the wholesale dealer. He cannot claim refund unless he shows a receipt. CENVAT applies only to manufacturing stage and does extend down to distribution stage till retail sale of goods. CENVAT mechanism extends for set off credit only amongst central excise ex cise duty and services tax into level of production. CENVAT does not extend to value addition by the distribution trade below stages of manufacturing. Manufacturers cannot claim set off against other central taxes and duties like additional excise duties surcharges.
2015
A sim D as G upt upta com commi ttee, Stat State lev level V A T was Based on the recommendations of Asim introduced. This replaced sale saless tax, turno turnovver ta tax, and and surcha surcharr ge on sale saless tax at at sta state lev level .
EVOLUTION OF GST In 2003, the K elkar lkar Task F or ce on indirect tax had suggested a comprehensive Goods and Services Tax (GST) subsuming central, state taxes, and interstate taxation based on VAT
pri pri nci nci ple. le. A proposal to introduce a National level Goods Goo ds and Services Tax (GST) by b y April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07. Since GST involves reform/ restructuring of not only indirect taxes levied by the Centre but also the States, an Empowered Committee of o f State Finance Ministers (EC) was constituted for designing a road map for the same. The first attempt to pass GST was made in 2011 by introducing the Constitution (115th Amendment) Bill in the Lok Sabha, which lapsed due to dissolution of 15th Lok Sabha. The Bill was again introduced as 122nd constitution amendment bill and now stands passed by both Lok Sabha and Rajya Sabha. Sabh a. Today it stands passed by both the houses of Parliament, pending approval approv al from more than 50 per cent of the states.
Current Indirect Taxation Structure that GST will Subsume:
Table representing taxation under different regimes
SHORTCOMINGS IN THE PRESENT TAX STRUCTURE AND NEED FOR GSTTax Cascading:
The most significant contributing factor to tax cascading is the p artial coverage by Central and State taxes. The exempt sectors are not allowed to claim any credit for the Cenvat or the Service Tax paid on their inputs.
Levy of Excise Duty on manufacturing point:
The CENVAT is levied on goods manufactured or produced in India. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax. Taxable event at manufacturing point itself forms a narrow base. For example, valuation as per excise valuation rules of a product, whose consumer price is Rs. 100/-, is, say, Rs. 70/-. In such a case, excise duty as per the present provisions is payable only on Rs.70/-, and not on Rs.100/-. Complexity in determining the nature of transaction :
Goods and services are currently taxed separately. Inability of States to levy tax on services With no powers to levy tax on incomes or the fastest growing components of consumer expenditures, the States have to rely almost exclusively on compliance improvements or rate increases for any buoyancy in their ownsource revenues VAT applies at manufacturing stage (CENVAT) as well as Sales stage (State level VAT).Therefore, there is a duality of taxation Input credit set off is not available against different taxes. For eg: set off not available for CENVAT against state VAT Different tax rates are levied across different states. Hence, it can sometimes increase the cost of production and lead to uncompetitive prices. Intra state transaction gets input credit set off but not inters state transaction. Therefore, a retailer or whole sole merchant is subject to duality of taxes Likewise as CENVAT, State VAT covers only sales. Sellers can claim credit only against VAT paid on previous purchase. Centre cannot impose taxes on goods beyond manufacturing (excise) or primary import (customs) stage. Centre only can tax services. State has no powers to tax services. State has exclusive domain of taxes on consumption.
Procedure for adopting GST Constitution Amendment bill
Salient features of the GST Bill:
No differentiation between good and services tax. One rate for both goods and services
Simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax; Tax will be levied on every supply of goods and services. Subsumes most of the Indirect taxes at state and central level (barring few exceptions listed below)
Keeping in mind the federal structure of India, there will be two major components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain.
Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of Central Excise.
Cross utilization of credit of CGST between goods and services would be allowed. Similarly, the facility of cross utilization of credit will be available in case o f SGST. However, the cross utilization of CGST and SGST would not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained below In case of inter-State transactions, the Centre would lev y and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services under Article 269A (1) of the Constitution. The IGST would roughly be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The dealer who imports would claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State. Producing versus consuming states.
o
Major manufacturing states like Gujarat and Maharashtra will lose a substantial amount of tax revenue, earlier accruing from interstate taxes (like Central sales tax), due to implementation of adestination based GST.
o
Such states will be completely compensated (100% of the losses) for the loss of revenue up to 5 years.
o
o
1% additional tax for I ntegrated Goods and service tax (I GST) tax for 2 years was proposed H owever this provision was deleted in the amended bill passed in Rajya Sabha. Similarly, the demand for constitutional cap on the rate of GST has also been done away with.
The input tax credit of CGST would be available for discharging the CGS T liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.
Centre & State to have concurrent powers to make laws on goods and services. Only centre can levy IGST (Intersect Supply of Goods and Services) and imports. Law made by parliament in relation to GST will not override state laws on GST. Input tax credit set off will be accessible across Intra and Inter-state transactions as GST will be one single tax at central and state level. The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of Central Excise Alcohol for human consumption has been exempted from purview of GST.
Taxing the imports under GST:
The Additional Duty of Excise or CV D and the Special Additional Duty or SAD presently being levied on imports will be subsumed under GST. IGST will be levied on all imports into the territory of India. Unlike in the present regime, the States where imported goods are consumed will now gain their share from this IGST paid on imported goods. Major features of the proposed registration procedures under GST: Existing dealers : Existing VAT/Central excise/Service Tax payers will not have to ap ply
afresh for registration under GST. New dealers: Single application to be filed online for registration under GST.
The registration number will be PAN based and will serve the purpose for Centre and State. Unified application to both tax authorities. Each dealer to be given unique ID GSTIN. Deemed approval within three days. Post registration verification in risk based cases only. Major features of the proposed returns filing procedures under GST: Common return would serve the purpose of both Centre and State Government.
There are eight forms provided for in the GST business processes for filing for returns. Most of the average tax payers would be using only four forms for filing their returns. These are: o
Return for supplies
o
Return for purchases
o
Monthly returns and
o
Annual return
Small taxpayers : Small taxpayers who have opted composition scheme shall have to file
return on quarterly basis.
F iling of returns shall be completely online. All taxes can also be paid online.
Major features of the proposed payment procedures under GST:
Electronic payment process- no generation of paper at any stage Single point interface for challan generation- GSTN
Ease of payment – payment can be made through online banking, Credit Card/Debit Card, NEFT/RTGS and through cheque/cash at the bank Common challan form with auto-population features Use of single challan and single payment instrument Common set of authorized banks Common Accounting Codes
THE
COUNCIL:
GST
The Federalism debate: The most discussed consequence of the passage of GST bill is the fiscal federalism.
The proponents of the GST bill are positive about the centre-state relations in this context of passage of the GST bill. It actually accelerates the reconfiguration of centre-state fiscal relations already underway. The experts argue that, States would become key stakeholders in the national economy, which was quite rare in the present scheme of things. An important feature of the new tax framework is the creation of the GST Council. The way it has been designed, the Union government has only one-third say in decisions taken by the GST Council, while the rest is accounted for by the states; and all decisions have to be carried by a three-fourth majority. Hence, this clearly indicates that centre and states need to co-operate with each other to ensure a smooth functioning of the tax administration. This, clearly is a double whammy for the states, which have their fiscal autonomy enhanced due to the increase in untied funds from net indivisible pool of taxes ( from 32percent to 42percent), as a result of the 14th Finance Commission.
However, the opponents of the GST argue that , the voting pattern in GST council is not completely based on economics. The purpose of the GST Bill is to concentrate on manufacturing and achieve excellence so that the same product is not manufactured locally with sub-optimal efficiency in every state for tax reasons. That being the case, it is natural there are going to be only a few manufacturing states while the rest will be consuming states. To have a council where the manufacturing state has one vote whereas all other states, likely consumers, also have a vote each is unfair. Of course consumers will vote in their own interests.
―Make
in India‖ Programme is focused for strengthening and protecting the domestic
industry from foreign import. Likewise, state governments have to protect local industry and employment. For this objective lesser sales tax and other incentives is needed for helping local producers. But the right of state governments for variable taxation will end with the introduction of GST regime. Further, economists argue that taxation powers are not only a measure of resource mobilisation. It could be used as a tool to control and restrict the consumption of some goods for social good. ( For example, Tobacco products generally attracts huge tax rate as a measure to control the consumption on health grounds. Here tobacco producing States argue for lesser taxes for maximum sales and the Consumer States will demand for a leverage for fixing higher taxes.) Health concerns ratify the higher rate of tax on tobacco. Now, this can be a tricky situation for the centre as to whose interests it should protect. Likewise, if a state government needs an additional resource mobilisation for facing a natural calamity, it cannot decide for any special levy. Swachh bharat and other Central schemes can only be decided and used by the Central Government. The GST will take away the rights of states to decide taxes according to their socio-economic situations. The situation in Kerala is quite different than the situation in Tamil Nadu or Assam or Bihar or West Bengal. Each state has its own socio-economic-political reasons to decide the type of tax to be levied.
Therefore, the experts argue that the veto power given to centre in the GST council is undemocratic. They opine for a more flexible weights based voting pattern and reduction in the weightage of the centre‘s vote.
Hence, there has to be more consensus on the structure, pattern and working of the GST council.
The term ‗Cooperative Federalism‘, sums up the ideology that would successfully define this
evolution: Together they stand and divided they will fail. In this, the recommendations of FFC, GST and other policies on the anvil are only stepping stones. Evolving institutions such as the GST Council and the revived Inter-State Council will be critical in overseeing this transition with minimal hindrances; state chief ministers are already equal partners in the governing council of NITI (National Institution for Transforming India) Aayog, which has replaced the Planning Commission.
Advantages of GST For business and industry E asy compliance
A robust and comprehensive IT system would be the backbone of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
Uni formity of tax rates and structures: Indirect tax rates and structures would be uniform across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
R emoval of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
I mproved competitiveness: Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost. Further, due abolition of multiple taxation, the warehousing practices adopted by large industrial houses are expected to come down. This would boost ancillary units, especially in
manufacturing, as the large industrial houses will freely contract out the fabrication to vendors due to reduction in operational cost as a result of GST. This will provide the adequate thrust and driving force for the success of Make in I ndia and
Ski ll I ndia. For Central and State Governments Simple and easy to administer:
Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.
B etter controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to
the
seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
H igher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency. For the consumer Single and transparent tax proportionate to the value of goods and
services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
R elief i n overall tax burden: Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.
GST rate:
Although a GST council is expected to work towards fixing a GST rate, it will be quite challenging to reach a consensus on the uniform rate of taxation. The challenge is further compounded by the lack of precedent on this front earlier. Producing and consuming states might have different viewpoints regarding rate of taxation. (For example producing states like Gujarat and Maharashtra might want low taxation on manufacturing of cotton textiles related goods, and consumption states like Haryana, Uttar
Pradesh might want high rate of taxation on retail sales of these goods leading to conflict). Compensation to States: The revenue foregone by the states as a result of transition to GST will be compensated by the Union government. However, there is no fixed formula or method on reaching an exact figure. The negotiations may have political overtones and could be a challenging task for the union government. Accounting Systems:
The cadre of Chartered accountants, Tax consultants, Tax bureaucracy and the like need to be trained on a new accounting system. This will require a lot of technological and institutional capacity building The retailers, whole sale merchants, small general store owners and the various stakeholders also need to transit towards a new system of accounting. This system may pose significant challenges specifically to small traders as they generally are not used to a robust account keeping system. Other challenges:
Cess ( education, Krishi Kalyan, Swatch Bharat) and surcharges charged by centre are currently not part of GST. States might have an issue over this. Further, GST will not apply to Petroleum crude, High speed diesel, Motor spirit (petrol), Natural gas, Aviation turbine fuel. These have a very high inter-connectivity with both manufacturing and service costs which might hinder seamless application of GST across sectors.
The Kelkar Task Force on the implementation of Fiscal Responsibility and Budget Management (FRBM)
Act, 2003, had pointed out that the existing system of taxation on goods and services suffers from many problems and, therefore, suggested a comprehensive Goods and Services Tax (GST). The proposed GST system is targeted to be a simple, transparent and efficient system of indirect taxation which involves taxation of goods and services in an integrated manner, as the blurring of line of demarcation between goods and services has made separate taxation of goods and services untenable. Since GST is a progressive step in the direction of tax reforms, introduction of the GST to replace the existing tax structure with multiplicity of Central and State taxes is being considered imperative in the emerging economic environment.
In the Indian context, initial discussions on GST started in the year 2000 under the aegis of an Empowered Committee headed by Shri Asim Dasgupta. Later, the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003 headed by Dr. Vijay L. Kelkar suggested for an All India Goods and Services Tax (GST) which would help achieve a common market, widen the tax base, improve the revenue productivity of domestic indirect taxes and enhance welfare through efficient resource allocation. A proposal to introduce a national level Goods and Services Tax (GST) was first mooted in the Budget Speech for the financial year 2006-07. Since the proposal involved reform/restructuring of not only indirect taxes levied by the Centre but also by the States, the responsibility of preparing a design and road map for the implementation of GST was assigned to the Empowered Committee of the State Finance Ministers (EC). In April, 2008, the EC submitted a report titled ―A Model and Roadmap for Goods and ServicesTax (GST) in India‖ containing broad recommendations about the structure and design of GST. Based on the inputs from the
Government of India and States, the Empowered Committee released its first Discussion Paper on Goods and Services Tax on 10 November 2009. In order to take the GST related work further, a Joint Working Group consisting of officers from the Central as well as the State Governments was constituted. This was further trifurcated into three Sub-Working Groups to work separately on draft legislations required for the introduction of GST, process/forms to be followed in GST regime and development of IT infrastructure needed for smooth functioning of the proposed GST system. In addition, an Empowered Group for development of IT systems required for Goods and Services Tax regime was set up under the chairmanship of Dr. Nandan Nilekani. Source: INFORMATION BULLETIN NO.LARRDIS(EF)2014/IB-11, DATED DECEMBER 2014 issued by LOK SABHA
INDUSTRY PROFILE
Scenario: NCR & Mumbai are by far the biggest hospitality markets in India, followed by
Bengaluru, Hyderabad & Chennai, besides hotels, the hospitality market comprises serviced apartments & convention centres Key Drivers: A robust domestic tourism industry, the increasingly global nature of Indian
businesses boosting business travel,tax incentives for hotels & higher FSI, expansion of physical infrastructure during the 12th Five Year Plan Notable trends: Serviced apartments appear particularly attractive within the hospitality space,
government initiatives to promote tourism in Tier 2 & Tier 3 cities is generating significant demand for hotels in such cities, especially for budget hotels
I ntroduction The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. The real estate sector comprises four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. It is also expected that this sector will incur more non -resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.
Market Size The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP). In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs. The private equity investments in real estate increased 26 per cent to a nine-year high of nearly Rs 40,000 crore (US$ 6.01 billion) in 2016.
Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times. The office space absorption in 2016 across the top eight cities amounted to 34 million square feet (msf) with Bengaluru recording the highest net absorption during the year. Information Technology and Business Process Management sector led the total leasing table with 52 per cent of total space uptake in 2016. Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cen t likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR).
I nvestments The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. The real estate sector in India is expected to attract investments worth US$ 7 billion in 2017, which will rise further to US$ 10 billion by 2020. India has been ranked fourth in developing Asia for FDI inflows as per the World Investment Report 2016 by the United Nations Conference for Trade and Development. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.29 billion in the period April 2000-March 2017. Some of the major investments in this sector are as follows:
International Finance Corporation (IFC) will invest US$ 200 million in Housing Development Finance Corporation Ltd (HDFC) via five-year non-convertible debentures (NCDs) or masala bonds which will be used b y HDFC to provide loans for affordable housing projects across India.
Ascendas-Singbridge Group, a property development company based in Singapore, has purchased six warehouses from Arshiya Limited for a consideration of Rs 534 crore (US$ 83 million), of which Rs 434 crore (US$ 67 million) would be paid on signing the definitive agreement, and the balance over four years on the attainment of certain targets.
Godrej Properties Ltd has tied up with Taj Palaces Resorts Safaris for developing its mixed-use project called 'The Trees', spread across 9.2 acres, that will include a 150room Taj Hotel, a luxury residential property called 'Godrej Origins' as well as a highstreet retail court.
Motilal Oswal Real Estate, a real estate-focused investment subsidiary of Motilal Oswal Private Equity Advisors Pvt Ltd, is planning to invest Rs 800 crore (US$ 124 million) in FY 2017-18 in mid-income residential projects as well as commercial o ffice projects.
Xander, a Private Equity Group, has signed two major property deals, which includes a special economic zone worth Rs 2,290 crore (US$ 354.95 million) in Chennai and a 2 million sq ft mall in Chandigarh for Rs 700 crore (US$ 108.5 million).
Canada Pension Plan Investment Board (CPPIB), the Canadian pension asset manager, has entered into a non-binding agreement with Island Star Mall Developers (ISML), a subsidiary of Phoenix Mills, to acquire up to 49 per cent in ISML in the next three years.
Altico Capital, a non-banking finance compan y (NBFC), has teamed up with American private equity firm KKR & Co LP to invest Rs 435 crore (US$ 65.25 million) in a 66acre residential township, being developed by SARE Homes in Gurgaon.
Gurgaon-based property search aggregator Square Yards Consulting Pvt Ltd has raised US$ 12 million from the private equity arm of Reliance Group for strengthening its team and expanding its presence to more than 25 countries.
Rising Straits Capital plans to raise US$ 100 million to capitalise its real estate-focused non-banking financial company (NBFC), Rising Straits Finance Co. Pvt. Ltd.
A joint venture between Dutch asset manager APG Asset Management and real estate asset platform Virtuous Retail, has acquired a portfolio of three shopping malls for US$ 300 million, and has committed an additional US$ 150 million as equity capital to expand the portfolio.
Macquarie Infrastructure and Real Assets (MIRA) and Tata Housing Development Co. Ltd have entered into a 70:30 partnership to invest Rs 1,400 crore (US$ 210 million) and Rs 600 crore (US$ 90 million) respectively in high-end residential property projects, starting with four major cities of Mumbai, NCR, Bengaluru and Pune.
Qatar Holdings LLC, a subsidiary of Qatar Investment Authority, has co mmitted to invest US$ 250 million in the affordable housing fund of Arthveda Fund Management Pvt Ltd.
Piramal Realty, the real estate division of Piramal Group, plans to invest Rs 1,800 crore (US$ 270.14 million) in an eight acre project named Piramal Revanta in Mulund, Mumbai.
Ivanhoe Cambridge, the real estate arm of Canada‘s second largest pension fund manager
Caisse de dépôt et placement du Québec (CDPQ), plans to enter into a Joint Venture (JV) agreement with Piramal Fund Management to set up a US$ 250 million venture, which will provide equity capital to developers of residential projects in the country.
Government I nitiatives The Government of India along with the governments of the respective states has taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Below are some of the other major Government Initiatives:
The Delhi Government has declared 89 out of 95 villages in Delhi as urban areas which will ease the operationalising of the land pooling policy, thereby giving a boost to affordable housing in Delhi.
The Reserve Bank of India (RBI) has proposed to allow banks to invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) which is ex pected to benefit both real estate and banking sector in diversifying investor base and investment avenues respectively.
The Ministry of Housing and Urban Poverty Alleviation has sanctioned the construction of 84,460 more affordable houses for urban poor in five states, namely West Bengal, Jharkhand, Punjab, Kerala and Manipur under the Pradhan Mantri Awas Yojana (Urban) scheme with a total investment of Rs 3,073 crore (US$ 460 million).
Road Ahead The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform which will help in allowing all kinds of investors to invest in the Indian real estate market. It would create an opportunity worth Rs 1.25 trillion (US$ ) in the Indian market over the years. Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised
processes to source material and organise manpower and hiring qualified professionals in areas like project management, architecture and engineering. The growing flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards.
The following are the major Real Estate Companies in India
o
DLF: DLF‘s chief business is to develop housing, marketable and retail properties.
Currently it has undertaken the development of 70 million sq ft of housing projects which it intends to finish in the next three years. DLF has joined hands with Delhi Development Authority to develop townships in Amritsar, Pune, Gurgaon, Mumbai, Chennai and Goa. DLF has been the construction company behind different malls in the major cities in India. The company is also developing 50-75 hotels along with Hilton Hotels and infrastructure and SEZ in India in collaboration with Laing O‘Rourke (UK).The current market cap is around Rs.51,8 32.22 crore.
o
Tata Projects: Tata Projects registered an annual turnover of Rs 2,300 crore on July
1, 2007. With more than 1,500 professionals the company has emerged as one of the chief player in EPC projects. Over the last four years, it has attained a CAGR of 50 per cent which quadrupled its annual turnover of 2006-07. Tata Projects functions in concentrated divisions like broadcast and distribution, steel, power production, oil, gas and hydrocarbons and industrial infrastructure.
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Omaxe : Omaxe has successfully executed more than one hundred and twenty
industrial, institutional, commercial and residential projects for a number of prestigious Indian private, public sector and Multinational's clients such as Amity University, LG, Pepsi, Samsung, Wave Cinemas, National Brain Research Centre, P.G.I. M.E.R, Apollo Hospitals and Delhi High Court.
o
Shapoorji Pallonji & Co: The Company has more than 3,500 professionals
working for it and is largely driven by its loyalty to consumer satisfaction. Some of the major projects undertaken by Shapoorji Pallonji & Co are World Trade Centre, Mumbai; TELCO industrial complex, Pune; Bhabha Atomic Research Centre, Kalpakkam; HSBC Bank, Mumbai; Hotel Taj Intercontinental, Mumbai; Bank of India, Mumbai; Indira Gandhi International Airport, New Delhi, etc. the company has created magnum opus of construction and has been a consistent executer of challenging projects.
o
Unitech: Recently Ramesh Chandra, Unitech‘s Chairman has declared the
investment of $ 720 million by his company in the coming four years to develop 28 hotels along with Marriott International. The market capitalisation of the company is Rs.16,867.40 crore.Its chief activities include construction, expansion of real-estate, consultancy in associated sectors, hotels, electrical broadcast and information technology.
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India Bulls Real Estate: One of India‘s largest listed developers developing
residential and commercial real estate. Being a focused regional player, more than 90% of IBREL‘s portfolio by value is in the three major markets of Mumbai, NCR
and Chennai. Established in 2000, the company has grown into one of the leading Indian business houses with its companies being listed on Indian and overseas financial markets having a combined net worth in excess of Rs. 18,000 crores. the current market cap being Rs.6,545.17 crore.
o
HDIL: Ranked as India‘s fastest growing real estate company by Construction
World-NICMAR in October 2007 & with a current market cap of Rs.8,567.76 crore, Housing Development & Infrastructure Limited has established itself as one of India‘s premier real estate development companies, with significant operations in
the Mumbai Metropolitan Region. HDIL is a public listed real estate company in India with shares traded on the BSE & NSE Stock Exchanges. With operations spanning every aspect of the real estate business, from residential apartment complexes to towers & townships, commercial premium office spaces and retail projects like world-class shopping malls. it is India‘s largest slum rehabilitation company, & was given the Mumbai International Airport Slum Rehabilitation project in October 2007,one of the largest urban rehabilitation projects in India. . o
Emaarr-MGF: One of the world‘s leading real estate developers company in India
and Development of properties in the residential flats, Commercial Properties, premium apartments etc. The ‗Commonwealth Games Village builder‘ is still trying
to get listed on NSE. Currently not listed.
LITERATURE REVIEW Review of Literature: Dr. G. Sunitha and P. Satischandra broadly discussed about GST in their research paper titled ―Goods and Service Tax (GST): As a new path in Tax Reforms in Indian Economy‖. The authors have tried to explain the concept of GST and different models of GST. They also focussed on the impact of GST on Indian markets. According to them the current tax structure is the main hurdle for growth of Indian economy. New tax structure of GST will remove this hurdles and boosts Indian economy.
Dr. R. Vasanthagopal concluded in ―GST in India: A Big Leap in the Indirect Taxation System‖ in International Journal of Trade, Economics and Finance, Vol. 2, No. 2, April 2011 that GST will be booming Indian economy. According to him India is suffering from complicated tax system. GST will give a boost to the Indian economy. KCG- Portal of Journals 2 | P a g e
Garg summarizes in the article ―Basic Concepts and Features of Good and Services Tax in India‖ published in International Journal of scientific research and Manag ement, 2(2), 542-549 about impact of GST on Indian Tax structure and find out that GST will strengthen nation‘s economy and development.
Neha and Manpreet Sharma describes about GST in their research paper titled ―A study on Goods and Service Tax in India‖. They tried to find out the benefits of GST and current status of GST in India. According to them we are moving towards GST due to faults in our current
indirect tax structure. Our current indirect tax structure is unable to increase the competitiveness of industries. Both the authors‘ emphasis on the benefits of GST Nitin Kumar write a research paper named ―Goods and Service Tax in India-A Way Forward‖
in ―Global Journal of Multidisciplinary Studies‖, Vol. 3, Issue6, May 2014 and he noted that implementation of GST in India will be a great move and it will be remove all the problems of current tax structure in India.
RESEARCH METHODOLOGY Statement of the problem The study is focused on the understanding of the GST and the impact of this on the real estate sector and the future growth of this sector, the positive impact is expected and hence this is study
Need for the study GST is the new law that has come into implementation from july 2017. Every sector of the economy has an impact of this new tax. This study try to understand the impact of GST on the real estate sector. Many positive reviews were given about this .There is a need for the study as the housing is one core area of the present government especially affordable housing
Objectives of the Study
: The design of this research is descriptive in nature. Necessary secondary data has been collected from various research papers, magazines, articles, news papers, websites etc. The objectives of the paper are: 1) To understand the concept and necessity of GST. 2) To study the features of GST
. 3) To examine the advantages of GST . 4) To study the challenges against GST. Present Indirect Tax Structure In India 5) To study the impact of GST on Real estate sector especially in Bangalore city
Research Methodology This research is completely based on the secondary data which is obtained from various articles , journals and news papers .
Concept and necessity of GST Salient features of proposed GST:
3.1 Dual GST: Both Centre and States will simultaneously levy GST across the value chain. Tax
will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted. 3.2 Inter-State Transactions and the IGST Mechanism: The Centre would levy and collect
the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pa y IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. 3.3 Destination-Based Consumption Tax: GST will be a destination-based tax. This implies
that all SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides. 3.4
Central Taxes to be subsumed:
i. Central Excise Duty
ii. Additional Excise Duty
iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
iv. Service Tax
v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
vi. Special Additional Duty of Customs-4% (SAD)
vii. Cesses and surcharges in so far as they relate to supply of goods and services. 3.5
State Taxes to be subsumed:
i. VAT/Sales Tax
ii. Central Sales Tax (levied by the Centre and collected by the States)
iii. Entertainment Tax
iv. Octroi and Entry Tax (all forms)
v. Purchase Tax
vi. Luxury Tax
vii. Taxes on lottery, betting and gambling
viii. State cesses and surcharges in so far as they relate to supply of goods and services. 3.6 All goods and services, except alcoholic liquor for human consumption, will be brought
under the purview of GST.
i. Petroleum and petroleum products have been constitutionally included as ‗goods‘ under GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, viz. Sales Tax/VAT and CST by the States, and excise duty the Centre, will continue to be levied in the interim period.
ii. Taxes on tobacco and tobacco products imposed by the Centre shall continue to be levied over and above GST.
iii. In case of alcoholic liquor for human consumption, States would continue to levy the taxes presently being levied, i.e., State Excise Duty and Sales Tax/VAT. 3.7 GST Council: In the GST regime, a Goods and Services Tax Council is being created under
the Constitution. The GST Council will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister and will have Minister in charge of Finance/Taxation or Minister nominated by each of the States & UTs with Legislatures, as members. The Council will make recommendations to the Union and the States on important issues like tax rates, exemption list, threshold limits, etc. The recommendations made by this Council will act as benchmark or guidance to Union as well as State Governments. One-half of the total number of Members of the Council will constitute the quorum of GST
council. Every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles:
i. The vote of the Central Government shall have a weightage of one-third of the total votes cast, and
ii. The votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.. This is to protect the interests of each State and the Centre when the Council takes a decision and is in the spirit of co-operative federalism. 3.8 Floor rates of GST with band: GST rates will be uniform across the country. However, to
give fiscal autonomy to the States and the Centre, there will a provision of a tax band over and above the rate of the floor rates of CGST, SGST and IGST. Initially, the rates of CGST, SGST and IGST are expected to be closely aligned to the Revenue Neutral Rates (RNR) of the Centre and the States. 3.9 Goods and Services Tax Network (GSTN): A not-for-profit, Non-Government Company
called Goods and Services Tax Network (GSTN), jointly set up by the Central and State Governments will provide shared IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders. 3.10 GST Compensation: Due to a shift from origin based to destination based indirect tax
structure, some States might face drop in revenue in the initial years. To help the States in this transition phase, the Centre has committed to compensate all their losses for a period of 5 years. Accordingly, clause 19 has been inserted in the Constitution (122nd) Amendment Bill, 2014 to provide for compensation to States by law, on the recommendation of the Goods and Services Tax Council, for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. 4. Salient features of the Constitution (122nd) Amendment Bill, 2014: The salient features of
the GST Bill as introduced in the Lok Sabha are as follows:
i. subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services;
ii. subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services;
iii. dispensing with the concept of ‗declared goods of special importance‘ under the Constitution;
iv. levy of Integrated Goods and Services Tax on inter-State transactions of goods and services;
v. levy of an additional tax on supply of goods, not exceeding one per cent. in the course of interState trade or commerce to be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates;
vi. conferring simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax;
vii. coverage of all goods and services, except alcoholic liquor for human consumption, for the levy of goods and services tax. In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council.
viii. compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period which may extend to five years;
ix. creation of Goods and Services Tax Council to examine issues relating to goods and services tax and make recommendations to the Union and the States on parameters like rates, exemption list and threshold limits. The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government. It is further provided that every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles: —
a. the vote of the Central Government shall have a weightage of one-third of the total votes cast, and
b. the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
x. levy of an additional non-vatable tax on supply of goods of not more than 1% in the course of inter-State trade or commerce, for a period not exceeding 2 years, or such other period as the GST Council may recommend, to protect the interests of the producing/manufacturing States. This additional tax on supply of goods will be levied and collected by the Government of India,
over and above the IGST levied under the proposed Article 269A (1). This tax shall be assigned to the States from where such supplies originate.
Possible Impact of GST on Real Estate Sector
The biggest reform in the indirect tax regime is set to get implemented very soon. Instead of different types of taxes — central, state, local and so on — soon there will be only one tax: the Goods and Services Tax (GST). Like any other sector, real estate will also come under the ambit of GST. However, as of now, there is lack of clarity on various aspects such as whether the rate of GST will remain at par with current applicable taxes and whether affordable or low-cost housing will remain out of the GST‘s ambit. Rea d on Possible Impact of GST on Real Estate
Sector .
SERVICE TAX
When you buy an under-construction house, service tax is levied on a certain percentage of the total value of the property, which is considered the cost of construction. Cost of land is excluded from service tax. To do this, income tax provisions allow abatement to the tune of 75% on underconstruction properties costing less than Rs1 crore; hence, service tax is calculated on 25% of the gross value. And, 70% abatement is allowed for properties costing more than Rs1 crore: service tax is levied on 30% of the value. Given that service tax of 15% is charged only on the construction cost, the effective rate on the entire value of a property costing below Rs1 crore is 3.75% (i.e., 15% * 25% of the property value), and for a property above Rs1 crore, the effective rate is 4.5% (15% * 30% of the property value). Thus, if you buy a property at Rs80 lakh, you will have to pay Rs3 lakh (3.75% of Rs80
lakh) as service tax. And, if the property was Rs1.6 crore, service tax would be Rs7.2 lakh (4.5% of Rs1.6 crore). Once GST gets implemented, ―Payment of service tax on the properties under construction does
not arise. It will be replaced with GST, Existing abatements under the service tax laws are also to be done away with post implementation of GST, So, it is likely that tax will be charged on the actual construction value. However, the concern is whether the GST rate would be higher than the prevailing service tax rate or lower. ―It is expected to remain around 12% or lower than 15% (the current applicable service tax rate). VALUE ADDED TAX
Some states like Haryana and Delhi also charge value added tax (VAT) on under-construction properties, which is again borne by a homebuyer. However, once GST gets implemented ―the
current composition schemes for developers under VAT laws of respective states would come to an end. VAT is a state subject and varies between 1% and 5% of the property value. There are many contentious issues for both developers and homebuyers regarding VAT. Some cases have also reached the apex court. Once GST gets implemented, it will simplify tax structure and reduce the scope for litigation, however this may increase the cost of real estate in states that never had VAT. STAMP DUTY
A homebuyer has to pay stamp duty to get the property registered. Even after GST, ―Stamp duty will continue, as GST will not subsume stamp d uty levied by government,‖ said Wadhwa.
Stamp duty is calculated as a percentage of the agreed value of the property, or the circle rate (the minimum price on which a property can be transacted, which is decided by the government), whichever is greater. In addition to stamp duty, typically 1% of the value of a property is charged as registration fee for registration of property documents (sale deed). In some states, if a property is bought in the name of a woman, the stamp duty levied is lower. For instance, in Delhi, properties registered in the name of women attract 4% stamp duty, compared to 6% otherwise. However, in case of joint ownership, where the property is bought jointly in the name of a man and a woman, buyers have to pay stamp duty of 5%, in case of Delhi.
In some states, stamp duty also depends on the region in which a sale deed is executed. For instance, in Haryana a man is required to pay 8% stamp duty in urban areas and 6% in rural areas, while women have to pay 6% in urban areas and 4% in rural areas. ―The
Task Force on Goods and Services Tax recommended in the Thirteenth Finance
Commission that real estate sector should be integrated into the GST framework by subsuming the stamp duty on immovable properties levied b y the states, to facilitate input credit and eliminate the cascading effect,‖ said Nangia. But ―due to political and economic considerations, stamp duty — which is a good contributor of
revenue to state government — is not subsumed in the GST framework for the time being,‖ added Nangia. As of now, taxes and duties can increase the cost of the property by 15-18% for home buyers. After GST gets implemented, whether the cost of houses will come down or increase, will depend on the rate at which GST is charged and whether there will be any abatement or not.
The Goods and Services Tax (GST) has finally become a reality, nearly one-and-a-half decades after it was first mooted. The journey towards a single tax system has not been particularly smooth as the GST has faced innumerable challenges due to issues regarding its structure, tax brackets and subventions for states that may face revenue losses. But in spite of the challenges and resistance, the determination of the government to implement GST showed the result, and it finally came into force on July 1.2017.
GST is one indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which essentially makes GST a tax only levied on the value addition at each stage. GST is a destination-based tax and will incorporate the various indirect taxes currently levied by the central and state governments, including excise duty, service tax and value-added tax (VAT).
There will be two components of GST - the Central GST (CGST) and the State GST (SGST). Both central and state governments will simultaneously levy GST a cross the value chain, on every supply of goods and services. The central government will levy and collect CGST while state governments will levy and collect SGST on all transactions within the state. More than 160 nations have already adopted a unified indirect tax structure. In Asia, countries such as Indonesia, Thailand, Singapore, and the Philippines adopted a GST during the 1980's and 1990's, creating an effective tax system, with the comparatively lower administration and collection costs. It has enabled countries such as Singapore to lower its corporate and personal income taxes, which in turn has encouraged more foreign direct investment (FDI) and stimulated the overall economic growth in the country.
How is real estate covered under GST?
The GST Council has categorised renting of immovable property (including a commercial, industrial or residential complex for business or commerce, either wholly or partly) as suppl y of service.It has also included construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, as a supply of service.
The act has identified lease of land and building, any lease, tenancy, easement and licence to occupy land as a supply of service.
However, sale of land and completed buildings will be out of the purview of GST.
Similarly, input tax credit has not been allowed for works contract services, when supplied for construction of immovable property or when goods or services or both are received for construction of an immovable property. Clarity is now awaited on the abatement for the cost of land (currently 70 per cent, subject to conditions), which is applicable for calculating service tax on investments in residential projects, which are under construction. How GST will impact real estate?
The cascading effects of the current tax regime have added to the high cost of real estate in the country. The removal of various federal tax barriers and creation of a common market will
improve the supply chain efficiency of the real estate sector as well. In the long run, GST is likely to be positive for the real estate sector, with the warehousing segment set to be the biggest beneficiary of the reform. It is expected to ensure that doing business in India becomes tax neutral, irrespective of the location. The investment decisions of warehousing operators will no longer be governed by the comparative tax advantages of various states, thereby enabling them to take informed decisions based on supply chain dynamics. As the warehousing sector moves towards a more systematic mode of operation, the sector is likely to witness the inflow of more institutional funding and formal sources of capital. A vast majority of construction materials are placed in the 28 per cent tax slab (slightly higher than the current tax rates); hence, the cost of internal fittings such as ceramic articles, tiles and granites, among others, may go up marginally. Buyers, therefore, can expect a higher price across mid-end/high-end and premium/luxury segments except for residential projects launched under the Pradhan Mantri Awas Yojna (PMAY), which has been exempt from GST (was exempt from service tax previously). While there might be a mixed impact on the ancillary industries that support construction activity, the removal of various federal tax barriers and creation of a common market will certainly improve supply chain efficiency, reducing the costs and delivery time of goods. The GST Council has allowed input tax credit (ITC) on the raw materials and services used for construction activity; hence, ITC will play a critical role in determining the final cost implications of GST on the real estate sector. Going forward, real estate players will be able to get ITC against their payment of taxes on inputs used during construction. It will also encourage increased tax compliance and reduce dependence on cash as the ITC can only be availed if raw materials are sourced from GST-registered vendors. GST also features an anti-profiteering provision, which would make it mandatory to pass on the benefits of ITC to end users - a move likely to be positive for reducing project costs. All in all, GST will bring in a transparent and corruption-free tax administration, removing the current deficiencies of the supply chain owing to multi-layered policies. It is a positive step for the nation, to enhance its economy's flexibility and achieve higher growth. With the scale of the real estate sector, it can drive economic growth across major business segments.
