Few moves will be more detrimental to the very spirit of the Goods and Services Tax (GST) than the recent announcement of GST rate cut from 12% to 5% on under construction real estate. This is because at 5% GST, there will be no input-tax-credit. However, at 12% GST currently, tax credit is available to the builders.
The very idea of GST was to avoid tax on tax. All products go through various stages of manufacturing, wherein different tax rates are imposed on inputs throughout the value chain. By the time a product reaches the final consumer, its inputs have already been taxed multiple times, which is unfair to the consumers.
Hence, GST was meant to avoid this very fundamental problem by allowing manufacturers at all stages of production to take tax credit for taxes already paid by their suppliers.
In the real estate sector, so far, builders have been able to get their tax liability reduced to the extent taxes have already been paid by the suppliers of inputs like cement, steel, etc. Due to this, the effective tax rate for them turns out to be 4% because they claim around 8% tax credit on an average.
However, in the new regime, they will not be able to take input tax credit. Therefore, at 5% tax rate, the real estate sector will actually be taxable at a marginally higher rate. Obviously, if builders have to pay more tax, they are going to recover it from the buyers.
If the Central Government was indeed serious about making real estate affordable for the consumers, it could have reduced GST on cement, which at present is 28%.
The question then is: Why has Union Finance Minister Arun Jaitley made this announcement? Most experts believe that it is to just give a sort of false impression to the consumers that real estate will be taxed at a lower rate.
The consumers are going to see through such tax jugglery sooner rather than later. Moreover, construction and real estate are huge sectors. If the very spirit of GST is defeated for such sectors, it only means that a large part of India’s overall economy will not be able to get benefits of GST.
Under the new rules, builders will have no reason to do business only with those suppliers who are GST compliant. At present, if you want to take input tax credit, you have to purchase inputs only from GST registered suppliers.
But, if you can’t even take tax credit, you will buy inputs from anyone, whether he is GST registered or not. Clearly, the latest GST cut on the real estate sector is anti-reform and the government will do well to take a re-look at it in the near future.
