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Is double taxation on homes fair to home buyers? written by Deepesh Salgia, published in Financial Express. May 5, 2019

&ldquoJeevan ke bas teen nishaan, Roti, Kapda aur Makaan&rdquo! This song from Manoj Kumar&rsquos 1974 legendary film talks of three fundamentals needs of human life. And yes, every government acknowledges the fundamental importance of home, clothing and shelter. But when it becomes a revenue matter for government, the first two are dealt with soft gloves but the shelter has always got the axe.

 

The classic example is GST on homes &ndash when introduced as Service tax about a decade back, the question then was whether the sale of an under-construction home was a &lsquoservice&rsquo or a &lsquotransfer of property&rsquo.

 

Courts held that legally speaking, it was both.

 

As a result, double taxation on real estate got an official stamp (Service tax plus Stamp duty).

 

But legality is just one lens to look at things. A legally correct interpretation does not necessarily mean that the interpretation has also passed the tests of fairness and rationality. The primary purpose of a nation is to make available fundamental needs at affordable prices.

 

Is double taxation on homes, therefore, fair to home buyers? However, since double taxation resulted in larger tax revenues, the then government found it convenient to accept the court&rsquos interpretation. Counter reaction was not palpable.

 

Subsequently, two years back when the govt undertook the biggest reform on direct taxes and moved to a Single Tax system across industries, it had the opportunity to reform the taxation on the home purchase and move to a single tax system.

 

But the govt chose not to and real estate probably remained the only sector that continued with double taxation &ndash GST plus Stamp duty.

 

Not just that, the service tax of 5.5% now had become GST of 12%, making home buying even more expensive. Yet, one saw no major opposition, despite it hurting home buyers. After industry&rsquo representation, 12% GST did get reduced to 5% GST (for new project) but not without caveats &ndash input credit was disallowed.

 

Effectively, increasing costs for developers. Not allowing input credit was also against the fundamentals of GST&hellip.and yet, one could only sense a general acceptance.

 

This gains more importance since the government&rsquos share in revenues of housing industry comes close to 25% (GST & Stamp duty on apartment + GST on entire inputs costs, + stamp duty on land + development charges + FSI premium, + open space deficiency premium etc.).

 

Such a high quantum of share of government&rsquos revenue from consumer spending exists only for five-star hotels, luxury cars etc.  Definitely, not for basic needs like food and clothing, where government&rsquos share is between 0-12% &hellip!

 

So the real issue now is how come governments after governments have maintained high taxation on a basic need and yet this legacy has continued without any political backlash?

 

And secondly, going forward, what options does a government have towards rationalization of tax on housing?

 

As far as the second question is concerned, the immediate reform the government can and should do is to subsume stamp duty with GST. Entertainment tax, Octroi, Excise, Sales tax have all been subsumed with GST, so there is no reason for stamp duty to be singled out.

 

Secondly, developers should be allowed to claim input credit.  This is in line with the principle of GST, so again there is a strong case for its legitimacy.

 

And the advantages:

 

a) Home buyers would then only pay GST as against paying GST plus Stamp duty, making homes more affordable.

 

b) Rationalization of taxation &ndash  a key agenda of GST.

 

c) Healthier balance sheets of banks/Housing Fin Cos:  Currently, the purchase of under-construction homes attracts double taxation, so the demand has shifted to ready homes. Thus, govt revenue comes down and also the revenue comes much later. Moreover, since builders get deprived of the fund through under-construction sale, the defaults in the realty sector has increased significantly.

 

A Single Tax for an under-construction apartment would mean more customers for under-construction apartments. The consumer would benefit as under-construction apartments are priced lower and also offer more choices. Improved liquidity for developers would result in lower defaults for banks.

 

To understand the second issue that why the legacy of higher taxes on home continues with no political backlash, one has to go deeper into human psychology and understand how masses think.

 

Firstly, real estate developers represent the &ldquolandlords&rdquo or the &ldquocapitalist&rdquo. Secondly, a larger number of developers have engaged in scams, in rogue activities and have been unfair to consumers. So, masses have unaddressed angst against developers. When a particular government increases the tax on developers, masses sense it as a signal of social justice.

 

So, no political dividends can be achieved by opposing high taxes on developers. This has made easy for governments after governments to increase taxes on housing. But, it is high time, governments and masses realise that such policies are also anti-consumer. But till that time, who do we blame for high taxes &ndash the government, the masses or the developers?

 

(By Deepesh Salgia, Director &ndash Shapoorji Pallonji Real Estate)

 

Disclaimer: Views expressed are author&rsquos own.