GST and the Indian Real Estate
GST , which has been implemented from 1st july , 2017 has stressed out most of taxpayers and dealers due to its compliance requirements . we will try to point out that how it affects the taxes in real estate sector. In the earlier tax regime , when property under construction was purchased , the purchaser was subjected to the payment of VAT , service tax , stamp duty and registration charges. Property purchased after completion were exempt from VAT and service tax , and only stamp duty and registration charges were payable. As we know that real estate industry contributes about 7.8% to Indiaâ€™s GDP and it is the second largest employment generator after IT industry.
GST Brings Transparency :
The enactment of this law brings transparency in the functioning of real estate sector , the overall increase in price for new residential properties could be lower than that for new commercial properties. After the implementation of GST ,the tax structure is under simplification process. All under- construction properties will invite a GST of 12 % with full input tax credit. However , GST will not be applicable for ready-to-move-in properties. In this category , the actual GST rate is 18 %. But one-third of this 18% is deemed as the value of land or undivided share of land supplied to the buyer of the property. Hence , GST rate lowers down to 12 % on under construction flats, properties or commercial properties with full input tax credit.
The GST regime has replaced multiplication of taxes and the builders now have to pay a higher amount in the 4-tier taxation but would get input credits eventually. Now, the burden of the higher taxes will be passed over to the home buyers. The home buyers will end up paying GST apart from those who are linked under the CLSS scheme. The 25th GST council meeting has passed the provision that the home buyers registered under the CLSS scheme will be only paying 8% GST on the one-third part of the land. So , it will directly impact the overall cost of building construction.
Will GST help Home Buyers ?
With the introduction of the GST , the total incidence tax will increase from 5.5 % to 12%. However , developers will be able to avail of input credit , on all the goods and services purchased and spent in the construction of the property .
Moreover , the prices of input materials can also be volatile. Cement and steel prices can soar , without warning. Similarly , sand is always in short supply and not available in the monsoons. Hence , it is likely that these industries may not pass on the entire benefit of tax credit.
Another important factor that needs to be examined , is the stage of construction. If the project is at advanced stage , where substantial cost has already been incurred before the application of the GST, very little input credit will be available and very less benefit will be passed on. If the project is at an early stage , more benefits can be passed on .
Strong case for bringing real estate under GST : Finance Minister Arun Jaitley :
Finance Minister Arun Jaitely , while delivering a lecture at Harward University on October 12 ,2017 , has said that the real estate sector should , ideally , be brought under the ambit of GST . â€œ The one sector in India , where maximum amount of tax evasion and cash generation takes place and which is still outside the GST , real estate. 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 , â€ jaitley said. The Finance Minister said the move would benefit consumers , as they will only have to pay one final tax on the whole product. â€œ As a result , the final tax paid on the whole product under the GST , would almost be negligible,â€ he said.
One year of GST : Gains and Losses :
Home buyers in the affordable housing segment , specifically , homes of up to 60 sq meters carpet area in size , have benefited significantly from the reduction of GST by 4 % ( from 12% to 8% ).
However , even almost a year after GSTâ€™s implementation , the only real clarity that exists for property buyers is on the prevailing GST rate of 12 % , on under construction projects. There is still confusion about the amount of rebate that a prospective home buyer is entitled to , on the back of the pass-over of ITC. The confusion is not only about the percentage of ITC but also on the mode and tranche of the rebate. On their part , developers are stating that they have to do multiple calculations , to arrive at ITC and will pass it on , only during the final tranches.
GST is definitely reducing developerâ€™s construction costs , by negating double or triple taxation to a more moderate level , through input tax credit. While there is no significant variations in the overall taxes , GST has certainly eliminated the tax-on-tax system. Also , shady transactions are being minimised considerably , bringing in transparency and accountability into the sector.
However , end-users have not received a consummate benefit because of the inherent ineffectiveness of the anti-profiteering provisions. They will only benefit , if the base property prices are reduced and the developers pass on the tax credits to their customers. While the tax-on tax has been eliminated with the advent of GST , the overall outgo from home buyerâ€™s pockets seems to have increased , considering that even after passing on of ITC , they may have to pay three to four percent more than in the earlier service tax+ VAT regime.