GST on land and real estate

The goods and services tax (GST) has been truly a transformational tax reform and it needs to both expand coverage and rationalise rates going forward.

There is, however, one area that has not been much talked about but could have a dramatic impact going beyond GST revenues. This is bringing ‘land and real estate (LARE)’ under GST. This measure will bring more transparency in the transactions conduced in the land market, add more revenues on the income tax side, and also encourage more foreign investments in the housing market, which will generate greater employment.

This move was actually extensively debated during the period before the implementation of GST. The imposition of GST on LARE data not preclude levy of stamp duty by the states or the levy of property tax by local bodies.

There are no legal impediments to levying GST on LARE, while states can continue to levy stamp duty, as the taxable event in both these cases is different. This principle has been upheld by the Supreme Court while upholding the aspect theory of taxation.

For the GST levy to be effective, it must cover the whole value chain from land to lodgings – from the development of land to construction to the first sale of constructed ready-made properties. This is certainly legally tenable. The sale of the land can be treated as the sale of the right to land as a service and taxed.

Besides creating the chain for a self-policing input credit chain, it will also curb the generation of black money income and incentivise land development instead of allowing non-agricultural land to lie idle. The GST levy will also remove the distinction presently made between construction services and ready-made property, with the former being taxed while the latter is exempt.

In order to keep the buyer of property away from GST formalities, GST payment could be made by the provider of the service under the reverse charge mechanism (the developer and the builder).

There would be no significant gains in GST revenues, as the revenue at the output end would be completely absorbed by the input duty credit availed on taxes levied on various inputs like iron and steel, cement and fixtures used in the construction industry.

The gains in revenues would accrue on the income tax side by facilitating better reporting of transactions at their true value.