GST: Understanding Impact And Product Solutions For Developers
The real estate sector is one of the most pivotal sectors of the Indian economy, ranked second only to agriculture. It has an average contribution of five to six per cent to the Indian GDP, stimulating demand for more than 250 ancillary industries, and playing a vital role in generating employment across the nation. It has also been one of the prime areas of investments; having seen a substantial growth of 22 per cent in the private equity space, and close to nine per cent in investments for residential properties in 2016.
The sector, of late, has indeed been subject to a sea of changes. Demonetisation was the first wave to hit the real estate shores last year, closely followed by the latest the Real Estate Law. The law aims to address the issue of non-transparency by affixing a certain level of accountability on real estate builders and brokers, which is unprecedented in the history of the Indian property sector. And now, with Goods and Services Tax (GST) ruling the roost, the sector is undergoing major transformations. Whether one is a developer, buyer, investor, financier or an intermediary, there will be a significant impact of GST on real estate stakeholders in several ways.
Impact of GST on real estate developers
Elimination of cascading taxes
Under the previous tax regime, a real estate developer was subject to customs duty, excise duty, VAT and entry taxes on the construction material cost. In addition, on the services used, such as – labour charges, architect's fees, approval charges, legal fees, –and so on, developers paid service tax of 15 per cent. Real estate developers thus grappled with the challenges of multiple-taxation, and the cumulative burden eventually passed on to the buyer.
Under GST, these are how the rates look like for various construction materials:
Pre GST (effective)
20% – 24%
Iron rods & pillars
Paint, wall fittings, plaster, wallpaper & ceramic tiles
20% – 25%
Sand lime bricks & fly ash bricks
25% – 26%
Thus, under GST, while there may not have been a significant change in the overall tax rates, the elimination of tax-on-tax, and the seamless availability of input tax credit is bound to bring down the final cost of construction. This will also decrease the price of housing units. This would in turn boost real estate sales, bring in more liquidity in the market, and ultimately improve profit margins – a positive impact of GST on real estate developers.
Lower cost of logistics
A key positive GST impact on real estate developers is the effective dissolution of state boundaries under GST. Previously, developers engaged in construction of property in other states would invariably face the brunt of compliance costs. This is since the central sales tax applicable for interstate sales, was not available as input tax credit. This would lead to increase of costs for the developer, forcing him to increase the price for his buyer, thus impacting his competitiveness. As a result, most developers would tend to avoid Central Sales Tax (CST) by setting up warehouses across states, reducing efficiency and increase costs as well.
Under GST, however, the need for multiple warehouses will go down greatly, which were being set up more for compliance rather than for operational efficiency. This will also imply lower transportation and logistics costs.
Simplified works contract
One of the key components of real estate operations is works contract. In the previous regime, works contract had a very complicated treatment, considered as a mixture of goods and services, both service tax and VAT was applicable on it. Given that, different states had different VAT rates, the complication was even more. On top, if the works contract involved manufacture of a new product, excise would also be applicable.
Under GST, the treatment of works contract has been much simplified, now considered purely as a service. Also, the GST rate for works contract has been fixed at 18 per cent. This not only eliminates the dual treatment of works contract, but also makes life easier for a contractor and sub-contractor by subsuming all the previously applicable taxes, again a positive GST impact on real estate developers.
Reverse charges on supplies
Under the service tax regime, a developer was required to pay taxes on certain services that were availed by him, such as, services of goods transport agencies, advocate firms, legal services, security services, and so on. On certain services, the developer had to pay 100 per cent of the service tax, whereas, on other services, he only had to pay a certain percentage of it, while the balance was paid by the provider of services. The service tax thus emerging under RCM had to be paid by way of cash or bank payment and was not dischargeable by using tax credit available to the developer. However, the service tax paid under the RCM was available as input tax credit by the developer.
In the new regime, while the nature of services which fall under reverse charge remain more or less the same, a major change has been introduced. Under the reverse charge mechanism in GST, a person who is GST registered, has to pay GST on all the supplies procured from a person who is not GST registered.
Earlier, when a developer availed the services of any professional, like architects or structural engineers, who were not registered under the service tax laws, there was no service tax liability on either of these two parties. This is bound to have a negative GST impact on real estate developers, due to the dual effect of the levy of GST on the services availed from unregistered person. In addition to this, it was required to discharge the reverse tax on goods received from unregistered suppliers. However, the GST council has announced a relief with respect to supplies of goods and services: the reverse charge mechanism will not apply in case the value of the supplies does not exceed Rs 5,000 in a day.
Availability of ITC on under-construction projects
For projects that are partially constructed and partially sold, both buyers and developers would have paid taxes under the previous regime, on EMIs and input costs until 1st July. Post 1st July, buyers will pay GST at 12 per cent on the balance payments to the developers, and developers will also get input tax credit on construction material procured.
In such a situation, the stage of completion becomes important to ascertain the GST impact on real estate developers. Thus, if for a project, the buyer has paid 90 to 95 per cent of the price in pre-GST, the GST will be applicable only on the remaining 5 to 10 per cent amount. After July 1st, any invoice issued by the developer will attract 12 per cent GST. Thus, in ongoing projects where work is towards the beginning, will lead to greater input tax credit for the developer compared to the ones which are nearing completion.
Product pointer for real estate sector
GST on rent
Under GST, the treatment of rentals is very clear. Those landlords, who are earning rental income by letting out their properties for residential use will not be taxed under GST – thus there is no GST on rent paid for homes. However, the GST rate on rent of commercial property will be 18 per cent, and will need to be levied only by those who are earning over Rs 20 lakh annually. In case the landlord is unregistered due to threshold limit, then the taxable person has to pay GST on rent under reverse charge – at the standard GST rate on commercial rent
For the above need, you should have a system to handle reverse charge mechanism. Tally.ERP 9 release 6.1 handle reverse charge with ease. You can mark any expense as reverse charge, after which system will not calculate GST during booking of such expense. A user needs to pass a JV to generate liability and maintain proper books.
Availing ITC on various inputs
GST will help cut down on the cash component in construction, as inputs will now have to be sourced from registered vendors to get input tax credit. Also, the GST returns process will ensure that both suppliers and recipients of goods and/or services are liable to disclose transaction details with respect to value, amount, GST rate etc. This will promote transparency in the ecosystem, and eligibility of credit will encourage participants to declare details, thereby minimising the scope for cash dealings, which is a positive effect of GST on real estate transactions.
This required a system to record purchase transaction will all necessary information such that while matching details of purchase in GSTR2 taxpayer should not face any issue. Tally.ERP 9 release 6.1 prevent errors while recording transactions. While recording transaction, if user overlooked any warnings, Tally detects such data entry errors or missing information required for GST compliant transaction and show such exception. The user can resolve these exceptions and correct data to make it GST compliant.
GST on Intellectual Property Rights
The GST law provides for a tax levy on the supply of goods or services, or both between related persons or distinct persons even when made without consideration. Usually, in the real estate sector, many entities of the same group use single logo/trademark without any consideration, which could imply the levy of GST, whereas there was no tax applicable earlier.
Now any supply of goods or services to related persons or distinct even when made without consideration need to charge GST. A user needs to raise outward supply transactions and charge GST. Tally.ERP 9 release 6.1 eases the process of configuring GST as per user requirement. It prevents from obvious data entry errors. For example, if a transaction attracts IGST (interstate tax) instead of CGST and SGST (state tax) Tally will not calculate tax under CGST and SGST (state tax) even if a user selects those tax ledgers. And if a user manually enters values (as Tally did not calculate automatically due to wrong tax), under the detection of error frame of Tally, such transactions will be shown as “Incomplete/Mismatch of information (to be resolved). Now user can take necessary corrective actions on such transaction before filing GST return to avoid any kind of rejection from GSTN portal during uploading returns. This Tally.ERP 9 technique of prevention, deduction and correction make sure every data byte which user uploads on GSTN portal are error free.
GST on Barter Transactions
Many barter transactions are witnessed in the real estate industry. For example, giving away of free flats in lieu of 'development rights'. In the previous regime, barter transactions were mostly exempt from VAT, since a 'value' was not involved. However, under the GST law, the tax will be applicable on all forms of supply such as barter, exchange, and so on, and the value of supply shall be determined in accordance with the GST Rules.
In such cases now every transaction needs to be recorded correctly and GST should be charged properly. A system with ease in an initial configuration, ease of updating changes, eliminating data entry errors while recording transaction, showing exception report if data entry errors are done, allowing users to verify data before filing etc are various needs of this sector. Tally.ERP 9 release 6.1 caters well. Apart from prevention, detection and correction technique towards data sanity, Tally.ERP 9 release 6.1 allows users to export GSTR returns into excel format which is importable into offline utility provided by GSTN. After export of GSTR return, the user has the flexibility to check various values which are getting uploaded. Once satisfied, the user can import this excel into offline utility, generate json file from utility and upload json onto GSTN portal. It's as simple as that.
On the whole, there seems to be a positive impact of GST on real estate developers. But a complete assessment of the sector can be made after understanding the impact on other aspects such as real estate buyers, loans, rentals and the sector in general.
Tejas Goenka is the Executive Director at Tally Solutions