Expanding GST: Focus on land and real estate

It will give an impetus to factor market reforms, which are essential to drive India's growth

The Finance Minister in her Budget speech mentioned that the goods and services tax (GST) has been truly a transformational tax reform and emphasised that it needs to both expand coverage and rationalise rates going forward.

A committee has been set up under the chairmanship of Bihar finance minister and has been directed to submit its recommendations within the next three months. The committee’s recommendations on rate rationalisation are important both for simplification and to nudge the GST rate incidence from the present level of 12.25 per cent towards the revenue neutral rate of 14.8 per cent (prevalent before the introduction of GST).

Another important area is to expand the coverage of GST. There has been clamour among some economists to include petroleum products under GST. In my view, this is probably not the appropriate time, given the diffidence among the states to maintain some fiscal sovereignty, especially to deal with emergency situations.

There is, however, one area that has not been much talked about but could have a dramatic impact going beyond GST revenues. This is bringing land and real estate (LARE) under GST. This measure will bring more transparency in the transactions conducted in the land market, add more revenues on the income tax side, and also encourage more foreign investments in the housing market, which will generate greater employment.

This move clearly needs a consensus among the states, and was actually extensively debated during the period before the implementation of GST. First, the Centre needs to allay the fears of the states by clarifying the legal positions. The imposition of GST on LARE does not preclude levy of stamp duty by the states or the levy of property tax by local bodies. There are no legal impediments to levying GST on LARE, while states can continue to levy stamp duty, as the taxable event in both these cases is different. This principle has been upheld by the Supreme Court while upholding the aspect theory of taxation.

Further, the Indian Constitution excludes land and immovable property from the definition of “goods”. While Singapore considers the sale of the right to land use as goods, in India we can certainly treat the right to use land as a “deemed service”.

For the GST levy to be effective, it must cover the whole value chain from land to lodgings—from the development of land to construction to the first sale of constructed ready-made properties. This is certainly legally tenable. The sale of land can be treated as the sale of the right to land as a service and taxed. Besides creating the chain for a self-policing input credit chain, it will also curb the generation of black money income and incentivise land development instead of allowing non-agricultural land to lie idle. The GST levy will also remove the distinction presently made between construction services and ready-made property, with the former being taxed while the latter is exempt. In order to keep the buyer of property away from GST formalities, GST payment could be made by the provider of the service under the reverse charge mechanism (the developer and the builder).

There would be no significant gains in GST revenues, as the revenue at the output end would be completely absorbed by the input duty credit availed on taxes levied on various inputs like iron and steel, cement and fixtures used in the construction industry. The gains in revenues would accrue on the income tax side by facilitating better reporting of transactions at their true value. Affordable housing, defined as dwelling units of carpet areas less than 250 sq ft, could be exempt from the levy. Similarly, government housing programmes under the Pradhan Mantri Awas Yojana could also be kept out of the ambit of GST.

The inclusion of LARE in GST would require the deletion of the entry from schedule III of the CGST Act, which treats the sale of land and buildings as neither a supply of goods nor a supply of services (it in fact should be treated as a supply of services). An amendment would also be required in the provisions of the input tax credit rules, which currently disallow duty credit on inputs used in relation to land and buildings. This policy move would create a Maruti moment for the housing sector and bring in considerable investment in this labour-intensive sector. This measure would also align with the current government’s thinking on reforms in the factor market, especially in land and labour. The inclusion of LARE in GST would fortify the gains made through the enactment of Real Estate (Regulation and Development) Act or RERA.

While this would be a big-time inclusion, the government could also consider expanding the GST list to include aviation turbine fuel (ATF) and natural gas. The inclusion of ATF would help in the aviation sector getting the benefits of tax credits on inputs. Similarly, natural gas is an intermediate input used in important sectors like fertilisers. The second inclusion could be the renewable segment in the electricity sector. Instead of bringing the entire electricity sector under GST, in the first phase, this could be done for the renewable sector (solar and wind). This sector is characterised by high capital investment, low operating costs, and shorter completion timelines. Bringing this sector under GST would help it avail taxes embedded in capital goods.

The suggestions made for the expansion of GST, especially regarding LARE, will give an impetus to factor-market reforms, necessary to drive job-filled economic growth in the next two decades.

The writer was member,  CBIC. The views  are personalThe writer was member, CBIC. The views  are personal