Real estate under GST: A great weapon in the war against black money

GST leaves a digital trail of transactions that serves as a deterrent for non-reporting or under-reporting the sale value of land or building

According to a report on the real estate sector by India Brand Equity Foundation (IBEF), a trust established by the Department of Commerce under the Ministry of Commerce and Industry, the Indian real estate market is expected to touch $180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP). Real estate's share in India’s GDP is estimated to increase to about 13 per cent by 2028. The sector is a major source of employment, especially for those belonging to the weaker sections of our society. But it is showing sub-optimal growth due to large-scale penetration of the black economy. Various research studies, including those by National Institute of Public Finance & Policy (NIPFP) and also the White Paper on Black Money tabled in the Lok Sabha on 21 May 2012, have repeatedly pointed to the vicious link between real estate sector and the black economy in India.

Containing black economy is a stated public policy objective, which the State strives to achieve, as it is eating into the vitals of the socio-economic & political fibre of the country. Poor governance (resulting from corruption) increases costs. Therefore, it becomes imperative for the government to bring in comprehensive reforms in real estate to make the campaign against black money successful. 

It is hard to value real estate, which makes it suited for undervaluation and an ideal investment for black savings. Understating of the value of immovable properties in the transfer deed is a major way of generating black income. The difference between the market value and the declared value of properties at the time of registration gives the extent of under-reported income.

The current regime of taxation on land and real estate incentivises widespread tax evasion, and generation and use of black money. At present, there is a plethora of taxes levied by different authorities on land and real estate (See Table: Important taxes & charges on land & real estate post 1 July 2017) which leads to cascading of taxes thereby increasing the distortionary impact of taxes on efficiency and productivity of the real estate market.

The present regime of transfer, registration and stamp duties, all being transaction-centric taxes, are amenable to inclusion within the GST base as GST is also a transactions tax. Inclusion of real estate within the GST fold will help in minimising the overall tax burden in absolute rupee terms. This will, in turn, enhance the elasticity and buoyancy of India’s indirect tax system, because the audit trail in GST will bring a greater proportion of real estate transactions into the tax net, augmenting the revenue collection. GST leaves a digital trail of transactions, which becomes a disincentive and deterrent for non-reporting or under-reporting of the sale value of the land or building, and thereby reduces the shadow economy. 

Important taxes & charges on land & real estate post 1 July 2017
	Name of tax	Taxing jurisdiction
1	GST (Indirect tax)	Both Centre & States
2	Stamp duty	State Govt
3	Registration charges	State Govt
4	Property tax	State Govt
5	Municipal tax	Local Body
6	TDR & Fungible FSI cost	Local Body
7	Staircase premium	Local Body
8	Land revenue & scrutiny fees	Local Body
9	Development charges	Local Body
10	Labour cess	State Govt
11	Estate duty	State Govt
Source: Government websites & Naredco

GST, because of its concurrent taxing jurisdiction of Centre and States over a common base and the seamless transfer of input tax credit facility --  which was hitherto blocked due to separate taxing jurisdiction of Centre and states -- provides the right incentive for key supply-side stakeholders such as real estate developers and brokers to bring their transactions into the formal tax net. This may considerably reduce speculative activity in the real estate sector due to pumping of illegally gotten wealth, which had spiralled up the prices in detriment to the interest of end buyers. Thus, the inclusion of real estate in the GST base will be a definite step towards attacking one of the major root causes of creation of black economy using real estate in India. 

In a step forward, the GST Council is expected to discuss the inclusion of real estate within the ambit of GST in its forthcoming meetings. The spirit of co-operative federalism needs to be leveraged to convince the reluctant States about the various long-term benefits of including real estate in GST base. In order to reassure the states of the continued access to their earlier kitty of revenue accruing from registration or stamp duties, the 12 per cent GST (including land portion) levied on construction of a complex, building, civil structure intended for sale to a buyer, partly or wholly can be increased proportionately, while scrapping stamp duty provisions and subsuming it into GST. This is expected to increase the velocity of real estate transactions, unlike under stamp duty regime, where duty becomes payable every time a document or a deed is required to be executed. Relevant amendments need to be done in the Seventh Schedule of the Constitution. We need to amend the definition of goods in the Sale of Goods Act, the CGST Act and the various SGST/UTGST statutes by including land and real estate in the definition of goods, as in the case of some countries such as Malaysia.

The Real Estate (Regulation & Development) Act, 2016 (RERA) brings in transparency and greater competition among various market participants in the real estate market. Developing a transparent real estate market by including land and buildings in the GST base will help break the unholy nexus between real estate market and black money, and also boost the economy as the sector has spill-over effects in about 200 industries such as steel, and cement. Housing sector uses numerous inputs, and eliminating taxes on intermediate products and business transactions through seamless flow of input tax credit will boost the efficiency and productivity of the housing industry. 

RERA alongwith GST can help in the consolidation of the real estate sector leading to robust and sustainable growth. The resulting increase in transparency is expected to boost trust levels, especially of the retail-level end-user buyer who perceives herself to have been short-changed by the developers of under-construction residential projects (with milestone-based payment) because of inordinate delays in offering possession. Rationalising the tax structure by subsuming the different indirect taxes on affordable housing under GST will also help achieve the government’s mission of ‘Housing for all by 2022’.

By bringing land and real estate under GST, the economic fundamentals of India’s economy would be further strengthened as the real sector comprising consumption and production will get a leg up due to enhanced productivity, transparency and competition following the comprehensive application of GST in the real estate sector. 

The writer is an Assistant Commissioner of the Indian Revenue Service (dhananjay.s@gov.in)

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.