GST Council should bring real estate sector under new tax regime at the earliest

Rahul Gandhi for once spoke sensibly when he insisted that the GST rate should be one-size-fits-all 18 percent enshrined in the constitution.

Finance Minister Arun Jaitley barnstorming the United States of America hot on the heels of the Congress Vice President Rahul Gandhi said real estate could enter goods and service tax (GST) soon following the deliberations of the GST council next month.

It is time it did because accounting for as much as 6 percent of the GDP, real estate is one of the three major components of the GDP pie which was left out by the GST council when it was rolled out with effect from 1 July, 2017. The other two are petroleum products and liquor with the former accounting for a whopping 15 percent share of the GDP. Critics might say there was a crying need for first bringing petroleum products into the GST net given its sensitivity and inelastic nature of demand but building a consensus on it is a lot more difficult than on real estate.

When real estate comes under the GST regime, it would subsume multiple state taxes like stamp duty and registration fees giving buyers freedom from a lot of last mile hassles. As it is, stamp duty varies egregiously from state to state with some states like Delhi giving concessions to senior citizens and women while others choosing to treat the sector as a milch cow. The main achievement of the GST in its current form is at least the rate of tax on a given commodity or service is the same across the country even though ideally for the sake of simplification and ease of doing business it ought to be a single rate as well across product and service segments. Rahul Gandhi for once spoke sensibly when he insisted that the GST rate should be one-size-fits-all 18 percent enshrined in the constitution. But Jaitley pooh-poohed it saying tax on Hawaii chappals and a BMW car cannot be the same.

Indeed, the GST reforms won’t be complete unless all products and services are brought into the net and the rate is uniform across product and service categories. The recent changes were at best palliatives compounding for turnover up to a heightened amount of Rs 1 crore being the mainstay.

As it is, the realty sector continues to reel under the cascading effect of tax on tax without input credit except when it comes to excise duty on construction materials. State finance ministers, however, would try to wangle as many concessions and latitude as possible even while reluctantly agreeing to realty being brought under the GST regime. For example, regional parties would try to take up cudgels for their poor and wretched and say GST on economically weaker section and LIG houses should be minimal with the brunt being borne by the villa and bungalow owners.

The most beneficial aspect of realty coming under GST would be prevention of tax evasion which is admittedly rampant as rightly emphasized by Jaitley repeatedly including in his ongoing US tour. In fact, after gold, realty is the second most fecund place for parking black money in the country with builders and buyers indulging in an unholy mutual back scratching.

Many items, especially those procured from the unorganized sector, like bricks and granite stones from illegal quarries are outside the tax net. Such things will become a thing of past with GST whose lynchpin is tax on value addition at each stage and the concomitant credit for tax already paid till the last stage making each successive buyer dig his heels for the fear of having to pay tax again on value additions made hitherto before he stepped in. The result would be builders having to perforce pay income tax as well on the full price. Used property sales of course would lend themselves to income tax evasion as usual for which solution lies elsewhere.

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