JANUARY 21, 2019

By Dr G Gokul Kishore

THERE has been a genuine concern over shortfall in collection of GST revenue. The agenda of revenue dominates meetings of GST Council these days. Reports also indicate that evasion has increased. Some consider this trend as not an indicator of big revenue leakage but the result of better monitoring. In this 21st part, let us focus on the fundamental issue of inclusion of petrol and other such products besides real estate sector in GST to shore up revenues.

Oil sector – From pipeline to drawing board

Indian GST is a product of intense negotiations between the Central and State governments and other stake-holders. The commitment to somehow implement such a major reform has led to an imperfect design as acknowledged officially. Agreeing to postpone coverage of crude, petrol, diesel, natural gas and ATF has ensured successful implementation of GST on other products but leaving such petroleum goods under the pre-GST levies. As fuel has traditionally been out of credit scheme earlier, user industry may not be impacted much post-GST as well. But, non-integration of such goods in the fold of GST has led to huge cost for the oil sector insofar as ineligible credits are concerned. Time and again, States are increasing VAT rates which are exorbitantly high. Keeping a set of commodities which are predominantly used by industry and business out of GST net for a longer period, will be more harmful than the short-term gain of trade-off between the Centre and the States resulting in implementation of GST in July, 2017.

Oil industry is mostly government-owned and, therefore, absence of input tax credit pushing up costs, has not evoked resentment one would normally expect from such adversely impacted sector. With the falling GST revenues, States may hardly be in a mood to relent on the issue of bringing such goods under GST. Revenue collection is a function of not only increased business activity and effective tax collection, but also of increased efficiency of tax system. When certain goods earning major revenue for the exchequer are not part of the GST system and when part of tax becomes unabsorbed cost to be loaded on to price, inefficiencies set in affecting consumer spending particularly in view of the ripple effect of fuel on freight cost. This gets aggravated when the rate of existing levies (VAT) is increased beyond astronomical levels. The time has come for the GST Council to deliberate on bringing petrol and other products under GST. Considering the sensitive nature of such issue and the extent of adversarial position that may be adopted by States, prudence may lie in bringing one or two items every year so that the process of integration will be completed in three years or so.

Real estate –Time to deliberate

Sale of land and building is not subject to GST but a host of services relating to land and building are liable to GST. The latest to join this list is transfer of development rights for which point of taxation has been specified by the government [Notification No . 4/2018-Central Tax (Rate), dated 25-1-2018] and advance ruling has also been issued even as the question of leviability has been subject of writ petition before Bombay High Court. Every conceivable activity relating to real estate or real property has been brought under tax net from service tax regime and the transfer of ownership by way of sale i.e. conveyance of such immovable property alone has been kept out of GST. Compared to petroleum products, non-inclusion of real property in GST has more to do with the complexities of the sector as such and less to do with States not willing to part with revenues from such transfers by way of stamp duties and registration fee. The sector is often perceived as not transparent, valuation as mostly under-reported and compliance and tax payment as poor.

Foreign jurisdictions like Australia and Canada tax supply of real property under GST law. Considering the quasi-federal nature of India and the pressures on Centre-State relations, it may not be entirely appropriate to compare Indian GST with laws of other jurisdictions. However, the merits of bringing real estate fully under GST far outweigh the political or other considerations. GST is system driven and the electronic / online processes have obvious advantages in terms of reducing the interface between tax administration and taxpayer and reducing effect on rent-seeking culture. Real estate sector is an ideal candidate for inclusion in GST system to infuse transparency. If real property is used for business, then input tax credit may have to be extended. This means, the transactions will come on board the normal supply chain and with credits, the often-alleged under-valuation of property deals may see a change for the better. Loss of revenue by way of stamp duties will be made good by fixing the rate appropriately. Amendment to the Constitution including relevant entries in Seventh Schedule may be necessary and stamp duties may have to be subsumed in GST but those are procedural and implementable if the governments at the national and sub-national levels are committed to usher in a near-ideal and comprehensive GST system.

Before the Rajya Sabha Select Committee on the Constitution 122 nd Amendment Bill (Report dated 22-7-2015), stake-holders and experts had expressed the view that Article 366(12) of the Constitution should be amended to include real property in the definition of goods. The FM had indicated last year on multiple occasions that some of the States are in favour of including real estate in GST. Recently GOM has been constituted as per the decision of GST Council with the stated objective of boosting the sector. Reports indicate that for residential construction, GST rate may be reduced to 5% with restriction on input tax credit. These measures may be well-intentioned but are not sufficient to address the fundamental issues affecting this sector and the buyers. We hope second year of GST will witness more deliberations in the GST Council on this issue and detailed studies are undertaken to enable an informed decision. We have intentionally mentioned the last point as this sector was noted as having slippery base and was not considered for estimating the base and rates by NIPFP in its report presented in January, 2013 on RNR (the study was sponsored by Empowered Committee of State FMs).

(…To be continued)

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are personal.]

See Part XX