Budget 2018: Will ‘Realty’ bite the dust or ‘rise’?

The sector’s biggest expectation from this Budget would be inclusion of the sector in entirety under the GST regime.

The real estate sector continues to be in limelight, under Goods and Services Tax (GST) on account of recent Anti-profiteering notices being issued to few builders. Perennial direct and indirect tax issues, implementation of the Real Estate (Regulation and Development) Act (RERA) and on-going slump has raised industry’s expectation from Union Budget 2018 -19. Builders are looking forward to the Budget to come up with announcements which can provide an impetus to the otherwise sluggish sector.

The sector’s biggest expectation from this Budget would be inclusion of the sector in entirety under the GST regime. Hitherto, only under-construction properties are included and sale of fully constructed property is not covered under the ambit of GST. This partial exclusion has resulted in denial of input tax credits, cascading of taxes and a case for imposition of other local levies like stamp duty, registration fees etc. Internationally, also the precedent has been for inclusion of real estate sector completely under GST.

The Government has formed a Committee to look into the inclusion of the sector under GST and this issue is likely to be discussed in the next GST Council meeting expected in January end.

In construction industry, it is a common trade practice for contractors to build an office at the construction site for administrative convenience and effective management. Under GST, such contractors are required to obtain registration for such temporary site offices thereby increasing the compliance burden.

Further, the contractors usually transfer expensive machinery (like boring, drilling, excavation equipment) from one site to another for usage across different states (entity wide). Taxing such trade movements coupled with impractical registration requirements has added to the compliance woes of the sector.

Also, the Government has introduced the concept of ‘first occupation’ in the declared service category under GST. Under Service tax regime, Service tax was not charged on construction of complex, building etc. wherein the entire consideration was received after issuance of completion certificate.

However, under GST, the said benefit has been extended even in the absence of the said certificate, provided the ‘first occupation’ has taken place. Though the said provision appears to be a blessing for the builders, the undefined expression ‘first occupation’ may germinate into a potential subject matter of litigation. Further, with regard to credit under GST, there is an ambiguity if the ultimate developer shall be entitled to credit of tax on works contract services.

While the sector has been riddled with various new issues, the long-standing issues like taxability of sale of Floor Space Index (FSIs)/ Transfer of Development Rights (TDRs), taxability of barter transactions in the form of giving away of free flats in lieu of development rights continues to haunt the real-estate sector.

Clarification on all the aforesaid indirect tax issues is something which the industry would look forward to in the upcoming Budget.

Alike Indirect taxes, there have been various conundrums encompassing the realty business from Direct tax perspective as well. Delays by contractors in delivering the realty projects is a common sight. As a result, a tax payer, who has sold a house and invested in another flat whose construction is required to be completed within the time limit prescribed under section 54 of Income Tax Act, is being denied exemption for such delays.

Further in the last budget, the Government had restricted set off of loss arising from house property against any other head to INR 2 lakh per annum. The said restriction has adversely impacted the lives of common man.

Further, clarification regarding inclusion of leasehold rights and tenancy rights in the definition of ‘land and building’ for the purpose of availing the benefit of reduced holding period is still awaited.

Resolution on aforesaid issues is what the industry is eyeing from the upcoming Budget.

While the Government intends to foster the ideology of an efficient and effective tax structure, reality sector is one sector which has been adversely impacted on account of long standing and unresolved tax issues.

It would be interesting to see how Budget unfolds for the sector and makes ‘realty’ either bite the dust or rise above the others.