Goods and Services Tax was introduced on the midnight of 1st July 2017 with the objective of “one nation, one market, one tax” fused a large number of Central and State taxes into a single tax. The single biggest indirect tax regime kicked into force, dismantling all the inter-state barriers with respect to trade. The GST rollout, with a single stroke, converted India into a unified market of 1.3 billion citizens. The construction industry is an imperative pillar of the Indian economy and has seen phenomenal growth, not just in urban cities, but even in rural towns as well. After the closing of the financial year 2019-20, we shall take a look back and determine the impact of GST on the entire sector.
Tax rates
GST, as equated to earlier regime hiked the rate of tax for the construction sector from 15 percent (service tax regime) to 18 percent. However, deduction of land value equivalent to one-third of the total amount charged by the developer for GST calculation has been allowed. This resulted in an effective GST rate is of 12 percent. For the sake of simplification and rationalization of tax rates especially for the residential real estate sector, the Government in April 2019 revised the tax structure under GST to increase the demand and to reduce the burden of tax on the end customer. GST Council provided this a one-time option to ongoing projects where construction and bookings started before 1st April 2019. This one-time option will allow the promoters to continue tax payment at old rates of 8% or 12% with ITC or to opt for new tax rates of 1%/ 5% without ITC.
This change in tax rates and ITC mechanism pushed the real-estate economy in a mode of reboot whereby demand and supply functions were in motion to find the new equilibrium prices. Government-issued multiple clarifications in the month of April 2019 to smoothen out the interpretational aspects of this new change.
Constructed properties
It is a point of notice that GST was neither applicable in the past nor would be applicable in the future on sale of constructed structures sold after issuance of completion certificate. Thereby there is no impact on the taxation on the same except physicological factors.
Litigation
GST is in nascent stages and litigation is bound to happen in every nook and corner of the country due to lack of jurisprudence on the subject, training of tax officers and knowledge of taxpayers/ tax professionals. The construction industry would also be no different, in fact, due to the sheer nature of operations, it is expected to see more than its fair share of litigations arising from distrust in minds of policymakers and tax officers.
In one of such cases 100+ home buyers, in case of Sukhbir Rohilla v. Pyramid Infratech (P.) Ltd, filed a complaint against the builder before the Haryana State Screening Committee under anti-profiteering laws of GST. They contended that Input Tax Credit on account of GST paid on construction services was not passed to the applicants. The case finally reached National anti-profiteering authority whereby it was held that the builder was guilty of profiteering.
The advance rulings on issues related to construction have witnessed a sudden hike in the GST regime. One important ruling was given in case of Maruti Ispat & Energy (P.) Ltd., wherein it was ruled that no GST input tax credit of civil structure would be available even if the same is used for support of plant and machinery. This led to an immediate increase in the cost of construction by 18%, as the credit became unavailable. This denial would force recipients to innovate new methods of procurement where credit would be available or they may fall back to the unorganised sector for procurements leading to massive tax evasion and the further downfall of the organized sector.
Many more judgments and ruling have been pronounced in kith and kin of the construction industry adding to the menace of litigations. With the rapidly changing tax provisions and issuance of notification on the subject it is expected that in the coming years, the number of litigations would continuously increase.
Structural changes in taxation
GST has over-emphasized the compliance requirements which are still in evolutionary stages posing regular threats to the compliance teams of the taxpayer. From April 2019 the government made numerous changes in the taxation of real estate which includes denial of tax credits, change the definition of “affordable housing” and the applicability of reverse charge on purchases from unregistered taxpayers. Such structural changes have a negative impact on the cash strapped and an over-regulated industry.
Stamp duty
Legislation of stamp duty has similar issues that existed in erstwhile indirect tax regime namely, the multiplicity of rules/regulations, differential tax rates in different states, manual processes, cascading effect of payments etc. Ideally speaking, stamp duty legislation should also have been subsumed under GST, so as to push the use of common digital infrastructure in reporting and payments. Hope the government would push the agenda of “One nation, one stamp duty” and we would witness the same.
Indian real estate and construction sectors have witnessed numerous ups and downs with various reforms being implemented. But today the sector is struggling to survive under a stringent legal and competitive environment. Further, this sector is also not untouched from the wrath of Covid-19. The industry is completely shut down till the lockdown is over. Not only small companies but also massive corporates are facing the heat. The Indian construction industry is one of the major contributors to the economic and social growth of the nation and thereby it is the inherent duty of government to support the livelihood of millions by extending sops by announcing a relief package for the industry during these challenging times.
Sources and Credits: Financial Express
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