Real estate to come under GST? Arun Jaitley sees strong case for it, Council to take up issue next month

The government is poised to take a call on including real estate in the Goods and Services Tax (GST) regime. The GST Council is set to take up the topic of bringing real estate services under GST’s ambit next month, Finance Minister Arun Jaitley said on Thursday. He went on to acknowledge that real estate is one sector with highest amount of tax evasion and cash generation occurs.

The matter will be discussed when the GST Council meets for its next meeting scheduled on 9 November in Guwahati, Jaitley said while delivering the ‘Annual Mahindra Lecture’ on India’s tax reforms at the prestigious Harvard University.

“The one sector in India where maximum amount of tax evasion and cash generation takes place is real estate and which is still outside the GST. Some of the states have been pressing for it. I personally believe that there is a strong case to bring real estate into the GST,” Jaitley said. The Indian real estate market is expected to touch $180 billion by 2020. The housing sector alone contributes 5-6 percent to the country’s Gross Domestic Product (GDP), according to India Brand Equity Foundation, a Trust established by the Department of Commerce, Ministry of Commerce and Industry.

“In the next meeting itself, we are addressing one of the problem areas or at least having discussion on it. Some states want, some do not. There are two views. Therefore, by discussion, we would try to reach one view,” he said.

Bringing real estate under the ambit of GST would result in consumers paying one “final tax” on the whole product, which would be help them by making the taxes almost negligible, Jaitley said. As of now, a 12 percent GST is charged on construction of a complex, building, civil structure or intended for sale to a buyer, either wholly or partly. On the other hand, land and other immovable property have been kept free from the GST.

Only yesterday, the Ministry of Finance also presented a proposed GST structure for petroleum and oil sector, as decided upon during the last meeting on GST Council on 6 October. The structure is expected to check cascading effect of taxes on petroleum products, as well as to incentivise exploration and production in the petroleum and oil sector.

On demonetisation, Jaitley said it was a “fundamental reform” which was necessary to transform India into a more tax-compliant society. Jaitley said some people had “misunderstood” the objective of demonetisation “which wasn’t to confiscate somebody’s currency”.

“Obviously if somebody has currency and deposits in the bank, it does not become lawful holding. They still have to account for it. Therefore, the anonymity which was attached to a cash currency came to an end and that holding got identified. The government was able to trace out about 1.8 million people whose deposits are disproportionate to their normal incomes. And they are all answerable to the law and pay their taxes,” he said.

“If you see the long-term impact of it, demonetisation brought in more digitised transactions; it brought the issue to the centerstage. It expanded the individual tax base. It compressed the cash currency by three per cent which was operating in the market. Those objectives are for the long-term. No doubt there are short-term challenges, but necessary for transforming India from a non-compliant to a more compliant society,” he said.

The finance minister said India had historically been one of the least efficient tax systems in the world with an extremely small tax base. “In the last few years, the bulk of the increase in tax payers has not been in terms of number of companies but individuals who are coming into the tax net,” he said.

Jaitley emphasised that systematic efforts to challenge the “shadow economy” were made only recently. He also added that the reduction in eventual expenditure coupled with incentivising people to enter the tax net may help reduce the size of “shadow economy”.

Jaitley is on a week-long stay in the US, during which he will participate in annual meetings of the International Monetary Fund (IMF) and the World Bank . Both agencies have recently downrated India’s growth projections.