GST and its Impact on Real Estate in India

GST and its Impact on Real Estate in India

With GST (Goods & Service Tax) regulation, India is going to experience the most radical tax related reform in several decades. The new bill will certainly have a reflective effect on the Indian economy. GST is applicable as per law from 1^st July 2017.

Under GST, rates are fixed by GST Council in a 4-tier tax structure: 5, 12, 18 and 28 per cent. As per the rules, mass consumption items will be taxed at 5 per cent and the luxurious items at 28 per cent.

Why GST?

With the introduction of GST, other taxes like central excise, service tax, VAT (value added tax) and local taxes will be replaced by a flat tax structure (GST) to create a uniform market – “One Nation, One Tax”. It is expected that GST will boost GDP growth and control tax evasion.

As said by Mr. Diipesh Bhagtani, Chairman (Exhibition) – CREDAI-MCHI, “Instead of paying various taxes, at various states and cities, it would be just one tax that is going to benefit. In the process, lot of labour and money will be saved. Taxes will be in line with the standard of the absorption of the industry and in the real estate sector, who have been suffering from excess of taxes, which in sum, amounts to 40%. If all that can be reduced then it’s a big advantage”.

Real Estate Taxes before GST in India

In India, before the implementation of GST, there were various kinds of taxes applicable on Real Estate – VAT & Services tax was directly applicable to the developers. VAT was applicable on sale of goods (i.e. on construction material), service tax was applicable on the labor & services component. VAT & Service tax vary from state to state and generally ranged from 7-9% put together. Then developers also had to take the burden of higher input costs because all the raw materials like cement, steel, iron rods, bricks, sand, paints, wall fittings, plaster, tiles etc. were also charged various kinds of taxes that ranged from 20-25% for most components.

 

How GST is different?

With GST, multiple taxation will go away. This is the biggest change for Real Estate. What it means is that when a developer has already paid GST on input materials, he can claim input tax credit. Let’s understand this in more detail.

It may seem that current taxes (VAT plus Service tax of 7-9%) are lower than the new GST of 12% on under-construction properties. But customers do not realize that the developer is also paying taxes on input materials which are built in his cost.

Now, with GST that will change. Although, the developer will charge a 12% GST to the customer, he will be able to claim input tax credit i.e. the taxes that he has already paid while purchasing various raw materials. So, in turn effective costs will reduce. As per GST he is bound to pass the input tax credit benefit to the customer.

So, as a customer you may feel that you are being charged a higher tax rate. But the base (on which tax rate is charged) will reduce because of the input tax credit.

GST rates for various raw materials:

Impact of GST on various types of properties

Under-Construction & Ready to Move Property

Under GST, all under-construction properties will be charged a flat rate of 12%. However, GST is not applicable on sale of ready-to-move in properties.

Affordable Housing

Projects under affordable housing scheme (including under-construction properties) are exempted from GST. This exemption is mainly given to support Prime Minister’s initiative of “Housing for all by 2022”.

Stamp Duty & Registration Charges

Stamp Duty & Registration charges remain unchanged. These charges vary from state to state. Generally, Stamp duty ranges from 4-10% and registration charges vary from 0.5-1% of property value, across states.

In a Nutshell:

• GST will simplify the earlier complicated tax structure.
• Reduce costs for developers by way of input tax credit.
• Buyers will benefit from the input tax credit, by way of paying GST on lesser amount.
• Affordable housing will get a push and we can expect more projects being launched under such schemes.
• Stamp Duty & Registration charges will be applicable for all types of properties and remain unchanged.
• With better regulations like RERA and GST coming into force, we can expect better transparency, management and increased buyer confidence in Real Estate sector.