Taxman agrees GST evasion by builder can’t be tackled

By: |
Published: February 26, 2019 3:54:42 AM

By opting for a lower GST without giving builders the option of input tax credit, in effect, the taxman has accepted that tracking down the evasion in the sector is impossible.

Given how the real estate sector is such a big source of black money, it is unfortunate that the GST Council has opted for this route.

Depending on how much builders across the country cut GST rates on under-construction housing—from 12% to 5% in the case of normal housing and from 8% to 1% in the case of affordable housing—the market for real estate should get a big fillip; indeed, the reactions of most builders over the weekend, when the proposal was announced, suggested that large cuts would be made in the retail prices. It would, though, be prudent to look at the actual cuts over the next few weeks since it is possible that builders will argue that, as they are being denied input tax credit, the cut is revenue-neutral for them; indeed, since some tax officials have said the move is revenue-neutral for the government, the same logic should apply to builders as well. Indeed, a recent analysis done by the GST authorities of the country’s top builders suggested as much when it pointed out that most builders were claiming very high input tax credit, possibly using fake invoices. In Mumbai, for instance, the study showed builders who should have been paying a 10.8% GST, on average, were paying a much lower 2.1%. The reduction, then, could well become the next source of litigation following action by the anti-profiteering authorities, if the price cuts are seen as too small.

ALSO READ: PM-KISAN: How record time fund transfer boosts Modi’s Digital India

By opting for a lower GST without giving builders the option of input tax credit, in effect, the taxman has accepted that tracking down the evasion in the sector is impossible. Given how the real estate sector is such a big source of black money, it is unfortunate that the GST Council has opted for this route. GST functions on the principle of one person’s tax becoming a credit for the next person and so on… allowing GST without input tax credit means the government will no longer be tracking the funds/materials flow across the sector. The government has done this earlier also, in the case of restaurants—each time such carve-outs are accepted, the government makes the GST system that much weaker; indeed, in doing so, the GST system of checks and counter-checks is, in effect, being replaced by the simple sales tax system.

ALSO READ: Soon, fly IndiGo to China: India’s largest airline mulls overseas expansion with flights to these countries

What makes the capitulation all the more unfortunate is that, with the number of top builders at less than 150-200, tracking their purchases wouldn’t really have been that difficult. Indeed, when the GST authorities did their tax evasion study for the top 88 builders, they clearly collected a lot of information; this could have been used to confront the real estate firms and to unearth their tax evasion. Indeed, given how GST officials are visiting traders and industry/service sector firms of a certain size to check if they have a GST registration, surely this can be done for builders as well?; even if a builder constructs just one reasonable-sized building in a year, this will mean a turnover of more than Rs 15-20 crore, a turnover that is far above the floor limit below which firms do not have to pay GST. In the past, partly because of teething problems in the GST’s IT system—the system wasn’t able to take the load of the number of invoices that needed to be uploaded at the same time—and later, because the government was keen to avoid antagonising taxpayers, it decided not to operationalise the system’s brahmastra, that of invoice-matching. If invoice-matching is not operationalised this time around—this is due from July 1—and if restaurant- or construction-type carve-outs are increased or even maintained at the current level, the present low-level of compliance is unlikely to improve in a hurry.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Stock market crash: RBI, SEBI caught napping, should have kept a closer watch
2Chinese gene-editing experiment may have had unintended, unpredictable consequences
3Subdued animal spirit: Private investment slumbers as uncertainties fester