Tax consultants warn against danger of ITC withdrawal for real estate
Alongside an overall cut in the goods and services tax (GST) for the real estate sector recently, the Government of India has also announced the retraction of input tax credit (ITC) for the sector, a policy that has drawn criticism from consultants at PwC, Deloitte and EY for its shortcomings in terms of black money.
As a minimum amount available on all transactions, the ITC is a benefit of sorts available to firms that also acts as a mechanism by which transactions can be tracked and audited. Nevertheless, in light of a reduced GST rate to 5%, the government has deemed the ITC unnecessary for the real estate sector in India.
Real estate is expanding rapidly in India, with some placing annual growth in the sector at 9%. A number of causes have been proposed for this growth, including an overall increase in prosperity and an increase in foreign investment, which is creating demand for residential and retail real estate respectively.
Others have argued that the introduction of the GST, among other government policies that focus on development in tier 1 and tier 2 cities across the country, are the drivers of growth in the sector. According to consultants from some of the Big Four accounting and advisory firms, this latest policy could prove detrimental to the sector.
At a macro-economic level, the removal of a mechanism that allows the tracking of money creates room for rampant tax evasion, particularly in a sector such as real estate where large sums of money change hands. For the real estate sector specifically, the policy could drive the sector down the wrong path.
“It does go against the very spirit of GST. Restricting input is not a good idea for any sector, and particularly for real estate, which needs to be formalised more. It's more in the direction that it (government) wanted to give relief to the common man. But it is obviously not a good idea from a policy standpoint,” said Pratik Jain, Partner and Leader for Indirect Tax at PwC India.
Mahesh Jaising, Partner at Deloitte India added, “The government's standpoint was that in the first couple of months, even though all the credit was being granted to restaurants, the base price of a menu was not declining. From the optics of customer, 18 per cent GST also felt high.”
The Big Four alongside a number of other firms in India have been invested in ensuring the smooth entry of GST into the Indian economy, given its potential benefits to a number of varying sectors across the country. Consultants are helping firms comply with the new tax regime.
