The fourth part of a six-part series on GST
The real estate sector is a significant contributor to the gross domestic product (GST) and serves as a foundation for virtually all industrial and commercial activity. Further, housing constitutes a large chunk of the personal consumption expenditure, especially for middle and upper-income households. Excluding real estate from the scope of GST would thus result in considerable cascading of taxes and, at the same time, a major erosion of the tax base.
Real estate is currently subject to multiple taxes at both central and state levels, such as service tax on construction services and state VAT on building material used in a works contract. The states also levy stamp duty and registration fee on purchase of property. Little or no credit is allowed to the commercial and industrial sector for these taxes, leading to a significant cascading impact. Moreover, in this form, the system incentivises transactions without invoice to minimise/avoid the tax burden.
Under the Constitution, taxation of real estate or land is an exclusive domain of the states, giving rise to numerous constitutional challenges about taxation of transactions related to immovable property. For instance, the recent Finance Bill introduced significant amendments in the taxation of commercial property rentals and pre-construction agreements to sell a new residential dwelling, making these taxable services which would now attract service tax. Whether these are contracts for construction services is open to uncertainty. Where VAT applies to such contracts, disputes arise about the allocation of the sale price to land, goods and services.
Disputes have also arisen on whether erection of cell towers is manufacturing of goods, subject to central excise, or construction of real property. Underground fibre-optic cables could be treated as goods or real property, depending on whether they are inserted in a duct/pipe or buried directly. A sale of plant and machinery permanently attached to the factory floor would be real property, but sale of goods otherwise.
Such definitional and interpretational controversies could be addressed by integrating the real estate sector within the GST framework. Internationally, in the modern VAT jurisdictions such as Australia, New Zealand, Canada and South Africa, land and real property supplies are inseparable and indistinguishable from supplies of other goods and services. A similar practice can be adopted in the Indian context. The inclusion of real estate in GST would reduce the cascading effect of taxes and significantly improve reporting and compliance.
The states have been reluctant to include real estate in the GST base, perhaps because they would like to maintain their exclusive domain rights. However, exclusion of immovable property would only perpetuate the distortionary tax cascading and definitional complexities, denying the full economic benefits of the GST structure.
GST on real property transactions would warrant a review of the structure and rates of stamp duties and registration fees. The GST Task Force of the Thirteenth Finance Commission has proposed a phase-out of these levies, mainly on the grounds that they lead to significant cascading. However, in the interest of consensus building, the states could be given the flexibility to levy the stamp duty, but at a much reduced rate.
The author is partner, Ernst & Young. Views expressed are personal.
