'Taxing' Levies On India's Real Estate Sector

Real estate costs can be classified into three distinct categories -- the value of land, the value of material and goods, and the value of services rendered. Now, the Centre and states also impose taxes on real estate, direct and indirect, which leads to overlapping of charges. For instance, while the Centre imposes tax on service rendered in the form of service tax, states impose tax on goods and land value by levying stamp duty. While such a system leads to double taxation for the sector, it also increases the cost of compliance, making the implementation difficult. This further amounts to financial crunch and project delays, causing stress for all sector stakeholders. On top of that, a recent raise in the service tax rates is sure to add to the existing burden.

Different interpretations and court judgments have led to further contradictions for the sector. These include:

• There is a confusion of tax liability in case of a joint development agreement. 

• There is no clarity on service tax applicability on the construction started by a developer before execution of the sale deed. The same applies to VAT applicability on the construction started by a developer before execution of the sale deed. 

• There is no clarity on the tax liability in case sub-contracts to third parties are awarded. 

• Demarcation of costs into cost of goods and cost of services for the imposition of VAT and service tax also remains unclear.

And, that's not all.

• The sector also faces Central Value-Added Tax (CENVAT) credit restrictions. As a result, developers are unable to take the CENVAT credit with respect to excise, as well as the service tax already paid on any input in the form of goods or services received. 

• Excise duty, Customs duty, VAT and service tax are among the many taxes borne by developers currently. The definition of a developer and a contractor is not specified which leads to confusion on the taxing pattern.

A clarity on these topics may go a long way in reviving the sector. The sector hopes that with the introduction of the Goods and Services Tax (GST), things will change for the better.