Impact & Opinion

Gst Impact Analysis On Real Estate

Introduction

One of the most complex areas of the tax levied by the Centre and the States is works contract and sale of property. Currently, such transactions are broken into three parts – the value of goods and materials, value of services and value of land. The States apply VAT to the goods portion and the Centre taxes the services portion, with no explicit tax on the transaction value of land.

In GST regime, there will not be any concept of manufacture, sale or service etc. There will be only one concept i.e. ‘Supply’. Construction activities includes ‘works contract’ which is being categorized as ‘Services’.

Presently builders/developers are paying following indirect taxes :

  • Service tax (ST) on services either to provider or on reverse charge (sub contractors, manpower supply etc);
  • Value added tax (VAT) / Central sales tax (CST) on steel, cement, RMC, electrical sanitary, lifts, DG sets etc;
  • Excise duty on all items paid earlier to those on which VAT paid.

However, in GST all the above taxes would no more be applicable and there will be only one tax i.e. GST. Stamp duty would continue to be in force even after advent of GST.

Some of the services which commonly prevalent in the Real estate sector are discussed below:

  • Renting of immovable property
  • Construction services
    1. Construction of residential complex
    2. Commercial or Industrial Construction
  • Special services by builders
  • Works contract
  • Maintenance / Management of immovable property

Construction Services

S.No. Under Current Regime Service tax rate VAT Under GST Regime Rate
1. Under construction flats
Service tax is applicable on under construction flats on 30% of gross consideration where :
  1.  Flat size over 2000 sqft
  2.  Sale price over one crore
Effective rate 4.5%
(15% of 30% of gross amount)
Effective rate  8.75% ( 12.5% of 70%) Under construction flats
GST on construction of buildings intended for sale to a buyer, where the value of land is included in the sale value.
12%
All other cases where flat size is less than 2000 sqft
or  sale price is less than 1 crore
Effective rate 3.75%
(15% of 75%)
Effective rate  9.375% ( 12.5% of 75%)
S.No. Under Current Regime Rate Under GST Regime Rate
2. Ready-to-move-in property
Ready-to-move-in properties do not attract any service tax as the developer is selling a completed property.
     NIL Ready-to-move-in property
Sale of complete property (including land) where whole consideration received after completion of construction
       NIL

Current Rates and GST rates

Name of item GST Rate(%) Existing Rate(%)  (Excise + VAT)
Cement 28 30
Plaster 28 26
Ceramic tiles 28 26
Copper screws, nuts, bolts 18 18.5
Aluminium ingots, rods, wires 18 18.5
Tin bars, rods 18 18.5
Zinc goods 18 18.5

HSN for input products

S.No Article Name HSN Code
1 CEMENT BRICKS 68101110
2 ORDINARY PORTLAND CEMENT, DRY 25232910
3 PAINTS & VARNISHES BASED ON POLYESTERS 320810
4 COPPER BARS, RODS AND PROFILES 7407

Other impacts

Seamless flow of credits

In GST regime all the above duties/taxes (except stamp duty) will get subsumed, therefore a builders should be able to avail the input tax credit of all its procurement of goods/ services. Therefore, it would reduce the tax costs substantially in the construction industry.

Under GST, it is expected that seamless credit of all taxes paid on procurement of goods/ services will be allowed so that net outflow of GST liability would be minimized.

GST on Stock Transfers

Since, transfer of inputs/ capital equipments from one site to another is quite common in this sector. Therefore, builders operating from multiple locations in different states, then it would require to pay GST on stock/ Assets transfers from its premises in one state to its premises in another state.

Further, in case builders are having multiple business verticals within the state and if a builder opts to take separate registration for each such business vertical, then GST needs to be paid for stock transfers even when made within the same state.

Multiple Registrations

Concept of centralized registration for all the projects will end and builders having a site in multiple States would require to obtain registration in each State from were the construction activity/ supplies are being undertaken even though the project is for a very small period or for a small value.

ITC (Input Tax Credit)

In case of works contract

The composite supply of works contract in this sector will fall under the 18% GST rate with full input tax credit (ITC).

In case of construction services

Full ITC would be available for the various goods and services utilized in the construction, though any overflow of ITC beyond the output GST liability will not be refunded.


Impact of GST on Textile Industry

  • Taxes paid on purchase and installation of capital asset and equipment can be claimed as Cenvat credit. This will lead to up gradation and expansion of the Textile Industries with latest Improve technologies.
  • Under GST, All Fiber will be treated in same way. No discrimination between cotton fiber and man-made fiber.
  • Reduction in Manufacturing cost due to subsume the various fringe taxes like octroi, entry tax, luxury tax etc.
  • Input credit allowed on capital goods
  • Smoother input credit system.
  • Increased compliance burden.
  • Due to decrease exemption limit from Rs.1.5 crore to Rs.20 lakh the number of assesses would increase.
  • GST is a technology driven law, which would pose difficulties to small players, who may find it difficult to adapt.

Registration:

Firstly small Dealer and non registered dealer to apply for new registration if their turnover exceeds Rs 20 Lac in previous financial year. Dealers need to obtain separate registration for each state even if it pertains to the same dealership and covered under the same PAN. But dealer can opt for multiple registrations within the state for various dealerships.

Returns

Compliance burden will be very high in the GST System as one has to file 37 Returns in one financial year for each registration apart from ISD/TDS returns as the case may be

Accounting

Communication, flow of documents from vendor to tax consultant should be before 10th of the subsequent month. Therefore, accounting department needs to be faster.


Impact of GST on Logistic and Warehousing Sectors

Transportation & logistics Includes:

  • Transportation & logistics is a much wider term. It covers various service providers and services provided by all modes of transportation (e.g., air, road, rail and sea).
  • It also comprises related services such as warehousing, handling and value added services such as packaging, labeling, assembling etc.
  • Transport service is used both as intermediate input and in final consumption. Also the transport equipments are subject to multiple taxation at both central and state levels.
  • 60% of logistics in India moves by road and time spent at interstate check posts due to difference in taxes between states accounts to idle time (60% of total journey time) which will get eliminated in GST regime. Hence, transport time would reduce by 30-40% and transport costs by 20-30% leading to fall in prices by 3-4%.
  • Petroleum products are kept outside the scope of GST currently, and since nearly 50% of all goods transported is motor spirit, some of the benefits of GST may not reach end customer. Also, the reverse charge mechanism applicable to GTA (Goods Transport Agencies) would continue under GST.

Warehousing:

  • Warehousing decisions will henceforth be driven by considerations like location of major customer / market and optimization of goods movement. Since any supply would be taxed, branch transfers would get discouraged leading to optimization of transport. Elimination of statutory forms (C-Form, F-Form, E1-E2 etc.) would reduce the requirement for scrutiny at state borders.
  • Geographically central locations will benefit more, e.g. Nagpur, the centre of the country, is already benefiting from a change that will allow companies to move goods across state borders without being hamstrung by local levies.
  • The consumer durables sector is expected to witness maximum drop in the logistics costs as percentage of total sales, as their warehouses are built at different states to avoid interstate tax. Mostly, the consumer-oriented industries are going to have high impact of GST on its operations model rather than capital intensive industries.
  • The existing interstate taxation system has forced the companies to create and maintain warehouses in each state. Currently, there are around 20-30 warehouses per company, one in every state, in addition to this 20-30 Carry & Forwarding agents per state making the supply chain longer and inefficient, GST tax will be levied on transportation of goods and full credit will be available on interstate transactions. Logistic costs are expected to be decreased by 1.5- 2.00% of sales on account of optimization of warehouses leading to lower inventory costs which are set up across states to avoid paying 2% corporate sales tax and phasing out of interstate sales tax. There is immense scope for optimization of costs.

GST – BEFORE AND AFTER:

  • Let us consider the example of a manufacturing company in Chennai, which moves its goods to New Delhi. The actual sale happens in New Delhi and the finished goods have to be transported from Chennai to New Delhi across different states.
  • As per the current taxation norms, one has to pay Central Sales Tax (CST) when moving a good to another state and selling it in the other state. However, if the good is moved for stocking and not for sale, then CST need not be paid. So many companies in order to avoid paying CST, they show this movement as moving to stock and not moving to sell.
  • To do this, companies have warehouses in every state where the finish goods are stored and then the goods are transported for sale from the warehouse in each state.
  • With the implementation of GST, the companies will be free to setup their own warehouses to optimize cost and improve customer service.

IMPACT ON SUPPLY CHAIN

  • The structure of the supply chain in influenced by differential taxes based on geographical location. By eliminating multiple state taxes, the logistics companies are encouraged consolidate their warehouses instead of maintaining one in each state to avoid central tax.
  • This in effect brings the overall cost of the product down as the inventory cost and inventory carrying cost down. This directly affects the final cost of the product bring the selling price down.
  • The cost saved by the companies as a result of GST can be used to invest further to improve serviceability.
  • After GST implementation, the design of the supply chain will be based on customer service and logistics cost. It also offers flexibility into demand and supply matching.
  • GST would also enable firms to increase the accuracy of the forecast. Smaller warehouses can also be merged into one bigger warehouse and space optimization will be achieved.

IMPACT ON WAREHOUSING

  • With the implementation of GST, logistics companies can have restructure their warehouse locations and can have one central warehouse or can go for warehouses at specific locations or can adopt a hub and spoke model.
  • With GST the local state taxes are eliminated and there will be only one Goods and Services Tax across the entire country.
  • This enables the companies to achieve cost efficiency in their operations and thereby transferring this cost benefit to the end consumer in the supply chain.
  • Advantages on warehousing with respect to GST is that companies can consolidate stock at their warehouses. Demand variation at a particular warehouse can also be reduced. This in turn improves demand planning and improved inventory management.
  • Disadvantages of GST with respect to warehousing is that companies face challenges during route planning while having to deal with deliveries across a bigger geography.
  • With larger warehouses (in terms of capacity), the transportation lot sizes automatically increase, which results in the larger and more efficient trucks. The optimization and rationalization of these options provide the competitive advantage to the business.

IMPACT OF EXCLUSION FROM GST

  • With the introduction of GST, states have to forgo their authority on state levied taxes and has an impact on the states’ revenue. Hence, the reason why some of the goods such as Petroleum products, alcohol for human consumption and tobacco has been kept out of the purview of GST.
  • Keeping the petroleum products out of the GST would have serious implications on transportations sector and would not help achieve the actual goal of GST.
  • The motor spirit consists of the larger part (close to 60%) of the transportation business. Hence, exclusion of petroleum products from GST would add up to the additional costs and breaks the chain of credits of GST.
  • However, instead of excluding the petroleum products, they can included with higher tax rate and there can be a sharing basis between center and states. This would allow level playing field to transportation providers.

GST (Electronic Way Bill)

What is E-way Bill:

  • E-way Bill is an Electronic Bill which will be required for the movement of goods in case the value of goods are above Rs. 50000.
  • This Bill can be generated from GSTN Portal.
  • Every Registered Taxpayer must require this E-way Bill along with goods transferred.

Generation of E-way Bill for movement of goods:

  • Every Registered person who causes movement of goods of consignment value exceeding Rs.50000 shall be required to furnish information Electronically before movement of goods in PART A of FORM GST INS-01.
  • Where the goods are transported by the Registered person as a Consignor or the recipient of supply as a consignee, whether in his own conveyance or a hired one, both can generate E- way Bill in FORM GST INS-1, after furnishing information in PART B of FORM GST INS-01.
  • If E-way Bill is not generated by supplier or recipient and the goods are handed over to a transporter, the registered person shall furnish the information relating to the transporter in PART B of FORM GST INS-01 and the E-way Bill shall be generated by the transporter on the basis of the information furnished by the Registered person in PART A of FORM GST INS-01.
  • The Registered Person or the Transporter may generate and carry the E-way Bill even if the value of consignment is less than Rs. 50000.
  • Where the movement is caused by an Unregistered person, he or the Transporter may generate the E-way Bill in FORM GST INS-01.
  • Where the goods are Supplied by an Unregistered Supplier to the Recipient who is Registered, the movement shall be said to be caused by such Recipient if he is known at the time of commencement of movement of Goods.

When Transporter transfer goods from one conveyance to another:

  • Any Transporter transferring goods from one conveyance to another in the course of transit shall generate a new E-way Bill in FORM GST INS-01 specifying therein the mode of Transport.
  • Where the multiple consignments are intended to be transported in one conveyance, the transporter shall indicate the serial number of E-way Bills generated in respect of each such consignment electonically.
  • Consolidated E-way Bill in FORM GST INS-02 shall be generated by Transporter prior to the movement of goods.

What would be the causes if goods are not being transported:

  • Where the E-way Bill has been generated , but goods are not being transported as per the details furnished in the E-way Bill, the E-way Bill may be cancelled, either directly or through a facilitation Center notified by the commissioner with in 24 hrs of generation of E-way Bill.
  • E-way Bill can not be cancelled if it has been verified in transit.
  • The details of E-way Bill shall be made available to the recipient If registered , Who shall communicate his acceptance /rejection of the consignment covered by the E-way Bill.
  • Where the Recipient does not communicate his acceptance or rejection with in Seventy Two hrs of the details being made available to him on the common portal, It shall be deemed that he has accepted the said details.
  • The facility of generation and cancellation of E-way Bill may also be made available through SMS.

E-way Bill or a Consolidated E-way Bill generated shall be valid for the period as below:

Sr. No. Dirtance Validity Period
1 Less than 100 km One day
2 100km or more but less than 300 km Three days
3 300 km or more but less than 500 km Five days
4 500 km or more but less than 1000 km Ten days
5 1000 km or more Fifteen days

Inspection and Verification of Goods:

  • In case of Inspection of goods in Transit :
  • Summary Report shall within 24 hrs. of Inspection, record online in PART A of FORM GST INS-03.
  • Final Report shall within 3 days of inspection, recorded online in PART B of FORM GST INS-03.
  • Where the physical verification of goods being transported has been done during transit, no physical verification shall be done unless evasion of tax.

Detention of Vehicle:

Where a vehicle has been intercepted and detained for a period exceeding 30 minutes, the transporter may upload the said information in FORM GST INS-04.


Export of Goods/Services:-

Exports will be treated as zero rated supplies. No tax will be payable on exports of goods or services.

As defined under IGST law, a “Zero Rated Supply” means any of the following supply of goods/services namely:-

  • Export of goods/services; or
  • Supply of goods /services to a SEZ developer or an SEZ unit

Supplier of zero rates goods/services can claim credit of input tax irrespective of the fact that such services/goods are notified as exempted supplies. Further, it is important to note that incase a service is not an export of service under the definition of export of services, then GST shall be chargeable since there is no exemption as such.

A registered person making zero rated supply shall be eligible to claim refund 30 under either of the following options, namely:–

  • He may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
  • He may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied

Refund Procedure:-

Application for refund shall be filed only after the export manifest or an export report, as the case may be, is delivered under section 41 of the Customs Act, 1962 in respect of such goods

The application under shall be accompanied by any of the following documentary evidences, as applicable, to establish that a refund is due to the applicant:

  • A statement containing the number and date of shipping bills or bills of export and the number and date of relevant export invoices, in a case where the refund is on account of export of goods;
  • A statement containing the number and date of invoices and the relevant Bank Realization Certificates or Foreign Inward Remittance Certificates, as the case may be, in a case where the refund is on account of export of services;
  • A statement containing the number and date of invoices as prescribed in rule Invoice along with the evidence regarding endorsement in case of supply of goods made to a Special Economic Zone unit or a Special Economic Zone developer;
  • A statement containing the number and date of invoices, the evidence regarding endorsement and the details of payment, along with 2 proof thereof, made by the recipient to the supplier for authorized operations as defined under the Special Economic Zone Act, 2005, in a case where the refund is on account of supply of services made to a Special Economic Zone unit or a Special Economic Zone developer:
  • A statement containing the number and date of invoices along with such other evidence as may be notified in this behalf, in a case where the refund is on account of deemed exports;
  • A statement in Annex 1 of FORM GST RFD-01 containing the number and date of invoices received and issued during a tax period in a case where the claim pertains to refund of any unutilized input tax credit where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies, other than nil rated or fully exempt supplies;
  • A Certificate in Annex 2 of FORM GST RFD-01 issued by a chartered accountant or a cost accountant to the effect that the incidence of tax, interest or any other amount claimed as refund has not been passed on to any other person, in a case where the amount of refund claimed exceeds two lakh rupees:
  • Where the application relates to refund of input tax credit, the electronic credit ledger shall be debited by the applicant in an amount equal to the refund so claimed.
  • In case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking , refund of input tax credit shall be granted as per the following formula:

Refund Amount = (Turnover of zero-rated supply of goods/Services) x Adjusted Total TurnoverNet ITC

Grant of Provisional Refund:-

Provisional 90% of the refund shall be paid by the Proper Officer within 7 days of application, if he considers that prima facie refund is due to the applicant. The aforesaid provision is applicable subject to the following conditions:-

  • The person claiming refund has, during any period of five years immediately preceding the tax period to which the claim for refund relates, not been prosecuted for any offence under the Act or under an existing law where the amount of tax evaded exceeds two hundred and fifty lakh rupees;
  • The GST compliance rating, where available, of the applicant is not less than five on a scale of ten;
  • No proceedings of any appeal, review or revision is pending on any of the issues which form the basis of the refund and if pending, the same has not been stayed by the appropriate authority or court.

Forms for Refund:-

Name of Form Details
FORM GST RFD-01 Refund Application form
  • Annexure 1 Details of Goods
  • Annexure 2 Certificate by CA
FORM GST RFD-02 Acknowledgement
FORM GST RFD-03 Notice of Deficiency on Application for Refund
FORM GST RFD-04 Provisional Refund Sanction Order
FORM GST RFD-05 Refund Sanction/Rejection Order
FORM GST RFD-06 Order for Complete adjustment of claimed Refund
FORM GST RFD-07 Show cause notice for reject of refund application
FORM GST RFD-08 Payment Advice
FORM GST RFD-09 Order for Interest on delayed refunds
FORM GST RFD-10 Refund application form for Embassy/International Organizations

However, for electronic cash account, refund can be applied through Form GSTR-3, 4 or 7, wherever applicable.

Note that:- Supply to Jammu & Kashmir is not considered as Export of goods/Services.