Since the Model law of GST has come in public domain on 14.06.2016 and bill has been passed in Rajya Sabha and even expected to get effective from 01.04.2017. The purpose of this article is to give overview on impact of GST on Real Estate Sector due to change in Indirect tax structure. GST will play a major role in real estate sector as most of the purchases made by builder from unorganized persons, but in GST they need to purchase from organized persons.
This is 2nd in Series. (Impact of GST on various sectors)
One Tax: In Present structure of GST, there are various kinds of taxes such as Service tax, VAT, CST But in GST Regime there is only one tax i.e. GST however, there will be three parts such as CGST, SGST, IGST.
Works Contract is deemed as “Supply of Service”: The major issues are in Present regime of Indirect Tax is the difference in treatment of Works contracts in Service tax as well as VAT. Whereas in GST Regime if the transaction is works contract, the same shall be deemed as “supply of service”. For example: If a customer is paying the service tax on 70% of value assuming it is finishing works where as in VAT also if the person pays on 70% of value, the person end up paying tax on 140% of value whereas in GST Regime the person end up paying tax only on 100% value.
Increase in Margin: The key inputs for the builder are Steel, Tubes, Pipes etc. On purchase of said inputs builder was unable to get the credit of taxes paid on such inputs implies it was included in cost. Whereas in GST Regime it will be available as credit hence, the margin of builder may go up to the extent of credit available in GST which was the cost in present regime.
No Classification of Service dispute: In Present Regime of Service tax there are various disputes has been raised by the department saying it is “works contract service” and not “Construction of residential complex service” or vice versa, whereas no such disputes is going to arise in GST. This will save litigation cost as part of the cases in litigation is around classification issues.
No Cascading effect: In Current Regime of tax a builder is not eligible to take credit of CST on purchases made from interstate where as in GST the same is allowed as credit and there is no cascading effect to the extent of CST. However, Petrol & Diesel which is also key raw material of the Real estate has been kept out of the GST Regime, hence to the extent of the same cascading effect is going to be retain and the same will be added as cost. Further, there is no provision of exclusion of Property tax in GST Regime, may invoke basis fundamental of GST Regime.
No Joint Charge In works contract service: In Present Regime of law, there is huge problems has been facing while calculating the liability where the partly reverse charge is applicable for the procuring works contract service Whereas In GST Regime there is only Reverse charge concept introduced but no concept of joint charge is available.
Rate Contracts: It is expected that some of the industries going to have the inflation effect in price the movement GST come, hence it is an opportunity for the business to go for rate contract, where the Rate could be freeze for the next one year or case may be. By doing this a person may have edge over competitor.
Reduction In Price: In GST Regime, the prices of Steel, Pipes and similar goods is expected to come down hence, the it will be right time for the builder to choose the best vendor who decrease the price due to positive impact of GST.
CENVAT Credit: In Regime of Present tax, the builder is not allowed to take credit on Excise duty on Inputs and Capital goods, SAD on imports, VAT Paid on Inputs whereas in GST Regime total Credit is available. It is said that “what you pay, can take” unless it is contrary to law.
No assessment by multiple tax authorities: Generally A Builder are facing many difficulties in handling the assessments done by the Separate authorities for VAT, Service Tax, CST, etc. In GST Regime it is expected that assessment will be done by one authority to the extent of limit of turnover, if the turnover exceed prescribed limit than assessment going to be done by another authority.
Electronic Mode for Forms: In current Regime of tax there is very much manual filing of documents such as initial declaration and other forms but in GST Regime there will be less manual filing of documents and more through electronic mode. Further, the communication with department also could be through electronic mode.
Compliance:-In GST Regime huge Compliance would be there however, it could be negative impact as well as positive.
Rate of tax: In current tax regime the consumer pays approximately 6% as Service tax and 5% as VAT which comes around 11% whereas GST consumer might end up paying tax at the rate between 18% to 22%. The consumer end up paying 18% to 22% as most of the sale will be Business to Customer. However, the all credit will be eligible to Builder hence have to look whether the Builder is reducing the price to the extent credit available in GST or make it as his margin.
Huge Impact in Working Capital : As in present Regime Most of the builder are paying the taxes on receipt basis, Whereas in GST Regime there is no provision of paying the tax on receipt basis. Hence the before receiving the amount, builder needs to pay service tax as on service is provided. In GST Regime of tax, stock transfer has been made taxable, which requires the huge working capital as it is not clear in model GST Law that stock transfer within the state would be liable to GST or not.
Valuation: In present regime free supplies given by service receiver are not taxable as it does not have fall under the consideration whereas in GST Regime all the free supplies given by Service receiver also must be included in Valuation for GST. Further, freebies given at the initial bookings also must be assessable to GST.
Registration: Generally it is seen that Construction Company may have various sites in the country, in present regime he may take centralized registration and was adding the sites in registration certificate whereas in GST Regime construction company does not have any option and has to take registration in state wise which may increase the compliance cost.
Reverse Charge on Goods: In Current Regime Of tax structure there was reverse charge on specified services but in case of GST even the reverse charge will be applicable on goods.
Post supply Discount: If the Discount has to be given post supply than it must be known to both the parties at the time of supply or pre-supply and the proof of being known is the clause of discount must be there either in contract or agreement or offer etc.
Credit Criteria in Returns: In Current if the tax has been made the purchaser to supplier then he is eligible to take the Credit it is immaterial whether the same has been credited to Central Government by the Supplier or not. But in GST Regime, the matching concept if Tax Credit will be there, if Credits pertaining to Supplier does not match with Purchaser than it will not be accepted in return unless it is rectified by both the parties.
Procure from Organized Person: In GST Regime if the goods have been purchased from the register person then only Credit will be given otherwise the Credit will not be allowed. It is seen that specially in Real Estate Sector most of the purchases will be from unorganized person or unregistered person, hence to avail the Credit Builder need to purchase from organized Person.
No Compliance of “C” and “F” Forms: As stock transfer has been made taxable in GST Regime hence Concept of “F” Forms is no more relevant and IGST has been levied on all inter-state purchases or sale and Credit will be allowed, hence No Concept of form “F” is relevant.
Increase in Compliance-burden : There is going to be huge Compliance burden in GST Regime such as 37 returns for one office in a year, No debit Notes, Credit Notes to be issues after 30th Sep in succeeding year, Audit by Chartered Accountant after Certain limit etc.