With the Goods and Service Tax
(GST) intended to replace multiple levels of taxation, it is time to look at
how it will affect the Real Estate Sector – from home loans and housing
purchase to rentals, across various segments and in addition the grey areas
that affect GST will have on final price for a home seeker. GST seeks to
transform India with its “One Nation, One Market, One Tax” principle, and all
signs indicate that India’s real estate sector won’t be left out of the
Real Estate has always been
sector riddled with litigation owing to multiplicity of taxes and dual
administration mechanism, thereby exposing it to the conundrums of both Central
and State levies. Currently, certain activities in this sector command a
cumulative tax levy on effectively 140% of the actual transaction value owing
to cascading effect. Further there are long standing issues which have not been
concluded till date.
“Inclusion of real estate
in GST will bring more transparency and reduce the cascading of taxes. Bringing
the real estate sector under GST may take time as this will require several
legislative processes to be completed.”
GST on Immovable asset
In real estate, since land is an
immovable asset, the industry has been given a 33 per cent abatement on the 18
per cent GST. Therefore, the effective charge on the sector is now 12 per cent
as against the listed 18 per cent. During the period of construction, when the
developer collects money from the consumers, pays different vendors and service
providers and gets the asset constructed, the under construction product is
considered a service and therefore, comes under the purview of GST. It also
gets input credit from many of the 267 allied industries. Once the input credit
starts flowing in there would be clarity on how much the prices can drop by.
Impact on buyers &
Under the earlier law, buyers were
liable to pay taxes depending on the construction status of the property, i.e.,
whether the property was under construction or complete. When purchasing a
property under construction, a buyer was subjected to the payment of VAT,
service tax, stamp duty, and registration charges. Properties purchased after
completion were exempt from VAT and service tax, and only stamp duty and
registration charges were payable. Moreover, the state where the property was located
was also a relevant consideration because VAT, stamp duty, and registration
charges — all being state levies — varied from state to state.
The biggest takeaway is that GST
is a simple tax that applies to the overall purchase price. All properties
under construction will be charged at 12 percent of the property value. This
excludes stamp duty and registration charges. For completed properties, the
earlier provisions will continue and buyers will pay no indirect tax on sale of
Impact on developers
Previously, developers were
liable to pay customs duty, central excise duty, VAT, entry taxes, etc. on
construction material costs. They also had to pay a 15 percent tax on services
like labor, architect fees, approval charges, legal charges, etc. Eventually,
this tax burden was transferred to the buyer.
Under the new regime, however,
the changes in construction costs are not as difficult. It’s a mixed bag of now
duties expected to be more streamline giving effect in the long run.
Furthermore, the reduced cost of
logistics will result in a reduction of expenses as well. The input tax credits
will also help in increasing profit margins. A developer will be entitled to
take input credits on the sale of property under construction against the taxes
that are paid by the buyer. All this is expected to bring down the project cost
to the developers, and the developers will have to pass on the benefit of the
price reduction to the buyer.
Prior to GST, a huge percentage
of each real estate project expenditure went unrecorded in the books. GST will
cut down this percentage due to cloud storage of invoicing. The real estate
sector will also benefit with the new tax law having a positive effect on all
ancillary industries since this sector has a stimulating demand for more than
250 ancillary industries.
Input Service Distributor
Under GST, an ISD concept has been proposed
for transferring the tax credit of input services between two or more locations.
Any supplier of goods or services can be considered an ISD. An ISD can transfer
credit for all types of GST, including CSGT, SGST, or IGST. Further, an ISD can
be any supplier of goods or services. Considering the possibility of multiple
state registration, an ISD could be used as a tool to ensure optimal
utilization of head office related credit, resulting in actual cost reduction.
Furthermore, assesse of a reasonable size having ISD facility will have to file
61 returns in a year.
Compliance requirements are bound
to increase in the GST era, real estate firms will need to gear up. All
assesses (including composite dealer) will now be required to file annual
returns on or before 31st December following the relevant financial year.
Moreover, assesses must file annual returns for each registered branch and
warehouse. There is a mandatory audit requirement by Chartered Accountant or
Cost Accountant where the registered entity’s aggregate turnover during
financial year crosses Rs 1 crore. In cases where an audit is mandatory, the
annual returns need to be accompanied by a copy of the audited annual account
and reconciliation statement that reconciles annual returns audited accounts.
The impact of GST on real estate sector
is expected to be neutral. However we believe that there is going to be a
substantial benefit from GST as it will bring the required transparency and
accountability. Developers/Contractors would reap the benefit from the many
cascading taxes that will be subsumed within GST.
If GST is applied on land and
immovable property, the buyer has to pay one tax at uniform rate across states
(eg stamp duty varies state wise). Implemented efficiently and effectively, one
GST for real estate across the country is the way to go. How the states will
agree to this and what changes have to be made to compensate them for loss of
revenue remain subjects of debate. However, both, the industry and the
consumer, seem to be beneficiaries of a more transparent way of taxation
“Real estate sector should be
happy with GST even if the rate declared is higher than current rate”
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