GST may leave housing prices unchanged with 18% tax on realty: ICRA

27 Oct 2016


The government is likely to fix the GST rate on real estate at 18 per cent in the proposed 6 per cent to 26 per cent scale, which would not have much impact on housing prices, according to rating agency ICRA.

"Services, which would include works contract, are expected to fall under the 18 per cent slab. ICRA expects that at this rate of GST, the impact of the GST regime on the residential real estate prices will be broadly neutral, with some variation across states due to the divergences in current taxation practices," the agency said in a statement.

The Goods and Services Tax (GST) Council at its recent meeting discussed finance ministry's proposed of a a four-tier GST structure, with a lower rate of 6 per cent, two standard rates of 12 per cent and 18 per cent and higher rate of 26 per cent.

"A GST rate of 18 per cent would be higher than the current effective rate of VAT and service tax for sale of under construction property in most states," the agency said.

But, this higher tax rate is expected to be offset to some extent by a reduction in the basic price through better utilisation of input tax credits, it added.

Under the current tax regime, certain input taxes paid by the developer, such as excise duty and central sales tax (CST) on materials used for construction, cannot be offset against indirect taxes collected from customers.

However, under the GST regime, there would be better utilisation of these input taxes paid, which can lower the project cost.

Net impact on final prices will depend on the increase or decrease in GST rates of inputs over the current effective tax rates and the extent of savings on currently unabsorbed input taxes.

However, according to ICRA, the impact is expected to be more or less neutral and this could differ from states to states.

According to ICRA, states like Karnataka could see potential savings in the final cost to the end customer, whereas states like Haryana and Maharashtra could see higher prices.

The GST will subsume the main indirect taxes currently incident on the real estate sector such as excise duty, value added tax (VAT) and service tax.

But the final rates may vary from state to state depending on the varying VAT rates and differences in methods of valuation of services and goods portion of the construction contract.

Under the model GST law, it has been clarified that construction or works contract would be deemed to be a supply of service. Accordingly, the GST paid by the developers for all inputs such as labour, materials and other services can be taken as input credit and offset with the GST payable by the end customer.

"The GST is a positive step towards harmonisation of tax structures across the states and improving ease of doing business for companies," ICRA vice president Shubham Jain said.

Meanwhile, finance minister Arun Jaitley explained, in a blog post, the rationale behind the GST Council's suggestion of four GST rates, stating ''air conditioners and hawai chappals cannot be taxed at the same rate.''

The decision to retain some cess, such as the clean energy cess and the tobacco cess was to make good the centre's commitment to compensate states for any loss of revenue that may arise from the implementation of GST for the first five years, he wrote.

''Different items used by different segments of society have to be taxed differently,'' Jaitley said in his blog post. ''Otherwise the GST would be regressive. Air conditioners and hawai chappals cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. The Government should not lose money necessary for expenditure, nor make a windfall gain.''

''The tax on some products in a narrow slab regime will substantially increase,'' the finance minister added. ''This would be highly inflationary. A commodity being taxed by the Centre and the State at 11 per cent at present will be taxed at 12 per cent. If its taxation is suddenly raised on standard rate of 18 per cent, it would disrupt the market and would be highly inflationary.''

Jaitley also wrote that increasing direct taxes or the centre's debt in order to pay states' the compensation for the first five years of GST implementation was not feasible.

''Theoretically, it has been argued that the compensation be funded out of an additional tax in the GST rather than by cess,'' he wrote. ''Assuming that the compensation is Rs.50,000 crore for the first year, the total tax impact of funding the compensation through a tax would be abnormally high. A Rs.1.72 lakh crore of tax would have to be imposed for the Central Government to get Rs.50,000 crore in order to fund the compensation.''

''The alternative proposal is to have a cess account and continue same existing levies as cess for a period of five years before subsuming them as tax,'' Jaitley wrote.

''This would include clean energy cess and cesses on luxury items and tobacco products, which in any case, presently also pay levy higher than 26 per cent. This would ensure no additional burden on the tax payer and yet be able to compensate the losing states.''

So far, the GST Council has met thrice and the Finance Minister said that two more meetings are proposed post-Diwali.

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