The Goods and Services Tax (GST) has finally become a reality and is touted as the one of the biggest tax reforms in India. However, there is urgent need to safeguard the interest of buyers rather than just framing guidelines for developers, especially on the mechanism for input tax credit (ITC), says a research note.
In the report, Liases Foras, a non-brokerage research centric firm, says, "A detailed mechanism to ensure the smooth implementation of ITC facility is warranted to educate average home buyers about the process and implementation of ITC to make it what it is envisaged for."
At present, there is no transparent formula whereby a customer can ascertain what benefit he can get. "How do they ensure that 100% benefit is passed on to them? Where can the buyer verify details of input tax credit for the individual projects and calculate benefits available to her? At present, while their liabilities in terms of higher GST on subsequent instalments are fixed, their benefits are not fixed or guaranteed."
"It hinges on developer's capacity to get the ITC for input taxes for themselves first and then willingly pass it to buyers, separately for individual projects. Accurate estimation of both remains a challenge right now based on assumptions about pivotal things. Bottom-line, the tax is a pass-through and whether developers would reduce margins to pass on the benefits seems unlikely. Hence it will be given only when it is available with developers in actual terms," the report says.
While the GST is being lauded for simplifying the tax structure, the ITC is being seen as the biggest game changer whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. At present, the Industry is rife with speculation about the functioning or implementation of ITC facilities in real estate and its role to force a dip in real estate prices.
"This is because, under the GST structure, buying under-construction properties will attract a net effective rate of 12% as against the earlier rate of around 4.5-9%, including value added tax-VAT and service tax that varies across states. However, due to the input credit benefits that most builders will get on the key raw materials they buy, the buyer could actually benefit in terms of lower prices," Liases Foras says.
According to the rules, the quantum of GST a developer will be charging customers will be based on total outstanding amount as on 1 July 2017. This can be different for different customers in the same project. It is, therefore, possible that different customers in the same project with different amounts payable to the builder and different customers in different projects with the same amount payable to the builder may end up getting a different input set-off benefit.
Liases Foras explains this with an example, assuming the cost of construction for a housing unit worth Rs80 lakh is 50% or Rs40 lakh and of which the developer has so far spent Rs30 lakh. Under GST regime, the builder will have to pay the remaining Rs10 lakh after 1st July to get input tax credit from the vendors. Assuming that GST applicable to the builder is 18%, then the builder will pay a GST tax of Rs1.8 lakh to the vendor.
Now, for a customer who may have already paid Rs70 Lakh (possible under down payment plan) and has only Rs10 lakh as outstanding post 1st July, will have to pay Rs1.2 lakh (@12%) as GST, meaning that the builder can technically pass on the full input tax credit benefit of Rs1.2 lakh to this buyer.
As for a different customer, who has an outstanding amount of Rs60 lakh (possible under subvention schemes) as on 1st July, the amount due from him will be Rs60 lakh plus 12% GST, which is Rs7.2 lakh. Out of this, a developer may be able to pass on an input tax credit limited to Rs1.8 Lakh only.
"Further," Liases Foras says, "the troubling part for developers is that, they themselves are left in the quandary to ascertain regarding the ITC benefits they would be getting from their vendors. That again is also dependent on whether the turnover of the vendor is less than Rs20 lakh or over Rs20 lakh. For new projects or projects in early stages of construction, it may be relatively easier, but developers are left with significant challenges on how to rework contracts with existing customers in case of partly paid for projects well ahead into their construction, say 50%."
"Of course, the above analysis assumes the critical fact that all developers are willingly passing on 100% ITC benefit to buyers," the report says.
The developers may just have to because of the anti-profiteering provision. To ensure that manufacturers, developers and service providers pass on the benefit to the final customer, the Government has included an anti-profiteering clause in the GST bill under section 171 of GST law. This clause clearly states that it is mandatory to pass on the benefit of tax reduction due to input tax credit to the final customer.
If any developer chooses not to do so, then there are penal consequences, to be decided by Anti-profiteering Authority.
"Besides the aforesaid guidelines, there is no concrete mechanism to compel developers to pass the benefits. While these guidelines serve as a deterrent, But considering the track record of real estate developers, it remains to be seen how many actually comply with the law in an honest manner. Sadly, if they choose not to, it is the buyer who has to suffer and go through 8-11 months long time to get justice," Liases Foras says.
Already many confused buyers are writing to developers asking for clarity on their available benefits in response to developer's mails stating that going forward 12% GST is to be charged on future instalments. That is where there is scope for disputes and litigations, if developers are unable to provide satisfactory answers.
According to Liases Foras, valuation of land in the payment of taxes is another major challenge for developers who are expected to pass on the ITC benefits to buyers. As proposed earlier, stamp duty has not been summed up in GST.
"Hence, if the government does not come out with the abatement of the land value in the valuation of taxable amount, it will lead to double taxation of the land being transferred to the buyer during execution of the project. In case of a joint development project, total taxable value of land will be a matter of concern. In the coming times, this should be addressed by authorities and courts. The buyers may end up paying higher cost in absence of abatement of the land," it concluded.