Impact of GST on Real Estate

By : 360 Realtors

23 May, 2017

The biggest tax reform in the recent times, GST (Goods & Services Tax) has been rolled out in India after receiving a unanimous go ahead. The GST Council has decided the rates for the new indirect tax regime which would vary from 5% to 28%, with the standard rates being 12% and 18%. While the luxury items shall be taxable at 28%, the commodities of mass consumption would be levied a tax of 5%. Once implemented, this new tax is likely to include 17 indirect taxes and will levy one uniform tax rate removing the gap in the taxation structure across the nation.

For the home buyers, the introduction of GST will not bring much of difference in the existing tax liabilities. The GST council has partially included the realty industry under the GST spectrum through works contracts. At present a homebuyer pays several indirect taxes namely the VAT, service tax, excise duty, which comes to a total tax of around 11% excluding stamp duty. 

But under GST, for the Real Estate the buyers will have to pay a uniform tax at the rate of 12% which shall include all other indirect taxes except stamp duty. This shall be the case for only the under construction properties and not ready-to-move-in apartments or completed projects. Also, unlike earlier, the entire input credit like central sales tax and excise duty on construction materials being paid by the builders shall be allowed. 

 However, the abatement rate for the price of the land is still to be clarified by the government.  

The impact of GST on property in India

The realty industry of India is the second-largest employer and accounts for almost 5% of the country’s GDP. The sector had been facing problems in the management of multiple taxes like Excise, VAT, Stamp Duty, Service tax and Registration Fees.

As GST in India shall contain multiple indirect taxes so there are zero chances of double taxation and the new tax regime will also simplify tax compliance. So the homebuyers have a reason to smile even if the GST standard rate is a little high. Also, since GST will contribute approximately 2% to India’s GDP, this shall be a boost for the Indian economy. And if the economy does well, it shall be a help to the real sector on the whole accelerating the demand for property. Another reason to cheer is that since the buyers do not have to pay any indirect taxes for buying ready-to-move- apartments, the impact of this new tax on resale properties is going to be minimal.

For the under-construction properties, most of the buyers take a home loan based on the value of the property. They do not calculate the additional taxes they have to pay and in the end land up getting totally confused. But with the application of GST, the buyer is completely clear regarding the one standard tax he has to pay and that includes everything. The whole purchase and payment process would be very simple and convenient and will not even touch the monthly budget of the buyers. So in such cases, paying a little more will not pinch the buyers rather than burning their hands due to all sorts of ambiguities and confusions.

GST is profitable for the developers as well. There are several duties and taxes paid on the development side while procuring the materials like entry tax, central sales tax, customs duty, excise duty, etc. Paid by the developers initially but they are subsequently added in the project cost. Since the GST proposes to include all these various taxes into one, it means that the cost of construction and hence the pricing of the project will come down. The standard GST rate being somewhere between 12 to 18% will bring down the cost of construction for the developers. There shall be more funds available in the market which shall indirectly encourage the sales. This will also increase the margin of the developers.

The increase in tax for major inputs is very miniscule like for cement the total taxes were around 24% which is now a standard 28%, for steel it was around 17% but now is 18% and GST for works contract is also fixed at 12%.

Subsuming all major 17 taxes and charges into one consolidated tax, this new tax regime shall be total game changer for the Indian industry and would pull up the unwelcomed usage of double taxation that increased the prices for the end-users. In the real estate sector it would bring the organized and unorganized players on the same field within the ambit of GST. To sum it up, the GST enforcement shall prove to be a blessing in disguise for the real estate builders as it will lead to more transparency and professionalism in the realty market resulting in better control and monitoring of the same.