The existing tax liabilities of homebuyers will remain largely unaffected after the introduction of the Goods and Services Tax (GST) regime. The GST Council has brought the real estate sector under the GST ambit partially through works contracts. These will be taxed at 12 percent under the GST regime. Currently, a homebuyer has to pay several indirect taxes, including excise duty, value-added tax and service tax, which amounts to a tax outgo of about 11 per cent, excluding stamp duty.
Under the new regime, all the other indirect taxes will be subsumed and a buyer will have to pay a uniform 12 per cent tax on the purchase of real estate, except stamp duty. This is true for under construction properties but not on completed, ready-to-move-in apartments. On the other hand, entire input credit — excise duty and Central sales tax on construction materials that are paid by developers — will also be allowed unlike earlier.
Meanwhile, the government has told developers to pass on any benefits that they may avail under the new tax regime to the homebuyers. “The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/installments … It is advised to all builders/construction companies that in the flats under construction, they should not ask customers to pay a higher tax rate on installments to be received after imposition of GST,” a government statement said.
There have been reports of developers asking buyers to make full or large payments before the new regime comes into force on July 1, saying GST would make properties costlier.
GST In India
The Goods and Services Tax (GST) Council on November 3 set the rates for the new tax regime. These rates would range from 5 to 28 percent, with 12 percent and 18 percent as standard rates. While things of mass consumption would be taxed at the rate of five per cent, luxury would be taxed at 28 percent.
Finance Minister Arun Jaitley had on August 3 tabled the Goods & Services Tax (GST) Constitutional Amendment Bill in the Rajya Sabha, and initiated a five-hour debate on the landmark tax reform. The proposed indirect tax regime, which is likely to subsume 17 indirect taxes upon implementation, will remove the disparity in the taxation structure across the country and bring one uniform tax rate.
How Will GST Impact Real Estate?
The real estate sector is estimated to account for about five percent of India’s gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from 2015.
However, the sector faces issues in terms of macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multiple indirect tax levies, such as VAT, service tax, excise, stamp duty and registration fees.
As we prepare for GST ‘how it works’ might already be on your mind. Since the GST is to subsume multiple indirect taxes, it will simplify tax compliance and minimize the scope for double taxation. So, there is clear reason for home buyers to cheer, even if they have to pay slightly more in case the standard GST rate is high.
On how GST will impact the real estate sector, Ankur Dhawan, the chief business officer (resale), PropTiger, says: “GST itself is expected to add about 2 percent to India’s gross domestic product (GDP). That is a substantial boost to the economy. If the economy does well, obviously, there will be more demand for real estate, and it will be a boost for the sector.”
Why A Slightly Higher GST Rate Might Be Acceptable To Buyers
Since buyers are not liable to pay any indirect tax for the purchase of ready-to-move-in properties, the impact of GST on buyers of resale properties is likely to be very little. In the case of under-construction property transactions, buyers have to pay value-added tax (VAT) and service tax. While VAT is a state levy and its rate differs from one state to another, service tax is a central tax charged at 15 per cent. Overall, the current taxes on home purchase are not low and involve mind-boggling complexities.
Most buyers of under-construction properties take home loans to fund their purchase and the whole mathematics involved in the home loan process is quite baffling, too. In most cases, buyers do not carry out a detailed study of the various taxes that they have to additionally pay and they make their investment plans based only on the value of the property.
In the case of VAT, for example, there is little clarity on what amount is paid at which level, and what part of it is passed on by the developer to the buyer. Often, for want of more clarity on the VAT rate in his state – if at all the state is imposing VAT on real estate – a buyer has to rely on the clauses mentioned in his sale agreement with the developer.
Unfortunately, no amount of research helps the buyer know the right rate? Lengthy government documents are mostly interpretative in nature and if you are not a professional chartered accountant, you might get lost in the study, and yet get a little success. On the other hand, if there is a clear uniform rate for one tax that includes everything that they need to pay in taxes to authorities, the whole payment process would become very convenient for the buyer. In such a case, even a higher rate would be more acceptable to him than a lack of clarity.
Why Will Developers Love GST?
Since the GST is actually expected to bring down the project cost for developers, this would mean homes would, in fact, become cheaper.
There are many taxes and duties that a developer pays on the procurement side, such as Customs duty, Central Sales Tax, excise duty, entry tax, etc. These are subsequently passed on to the final pricing of the units and, thereby, to the buyer. As GST proposes to roll multiple taxes into one, the cost of construction will come down. This will bring more liquidity into the market and boost home sales. Free flow of credit for developers will also translate into an increase in margin in their hands.
“There are a lot of products developers procure for a construction of their projects on which there is double taxation at present. The cost they bear for these come to 20 to 25per cent of the cost of materials they are buying. So, with the GST rate, between 12% and 18%, it will reduce the cost of production for developers. This will be good for buyers, as developers will be able to pass a part of the benefit to them,” Dhawan adds.
For developers, the actual tax effect will be lower than the existing one mainly due to the input tax credit on raw materials that builders get against payment of taxes on inputs like steel and cement.
Moreover, the increase in tax is very less for major inputs. The indirect taxes on steel were around 17 per cent and that has now come to 18 percent under GST, similarly, for cement, the taxes totaled to nearly 24 per cent which now has been standardized at 28 per cent. The GST rate for work contracts has also been fixed at 12 per cent.
“There is no doubt that GST will be a game-changer for Indian industry, including for the real estate sector since it will subsume more than 16 major taxes and levies into a single consolidated tax. Additionally, the unified tax regime will stop the unwanted practice of double taxation, which hurt real estate and other sectors, given their cascading effect that inflated prices for end users. Though unorganized players are wary of GST’s impact, it will create a level playing field for organized entities; the former will now come within the tax ambit. With GST enforcing transparent transactions across all domains, this will be a blessing in disguise for real estate developers, too,” says Aman Agarwal, director, KV Developers, and a member of the Naredco governing council.
Through market mechanism, GST will impart more transparency to the sector, which faces a perception issue. GST would provide an audit trail for better control and monitoring of the sector.
Updated on March 7, 2017:
The government has clarified that property prices would not shoot up under the Goods and Services Tax (GST) regime. Addressing a two-day CREDAI conclave in New Delhi recently, Urban Development Minister M Venkaiah Naidu said property prices, especially of affordable housing, would not increase under the new tax regime.”We have already exempted affordable housing from service tax, and my ministry is addressing the need to continue this exemption under the GST. We have recommended to the Ministry of Finance to tax the sector at a rate which is revenue neutral and not at a higher tax rate,” Naidu said.
Updated on January 17, 2017:
The Centre and states have decided on sharing of powers for control over taxpayers under the Good and Services Tax (GST) regime. Under the consensus reached the ninth meeting of the GST Council, states will be assessing and administering 90 percent of the taxpayers falling under the Rs 1.5-crore annual turnover; the remaining would be controlled by the Centre. On the other hand, taxpayers with more than Rs 1.5 crore turnover will be administered by the Centre and states in a 50:50 ratio.
However, the new tax regime will now be rolled out from July 1. According to earlier plans, the Centre had to roll out the GST regime from April 1.
Update as on October 19:
In its third meeting on October 17, the Goods and Services Tax (GST) Council has proposed a four-tier structure for the new tax regime. The proposed regime will have a lower rate of six per cent, two standard rates of 12 per cent and 18 per cent, a higher rate of 26 percent, and an additional cess on luxury and “demerit” products.
According to media reports, while the higher rate for services under the indirect tax regime is proposed to be 18 per cent, essential services could be taxed at six
per cent or 12 per cent. Around 70 per cent of the taxable base is proposed to be taxed at either 18 per cent, 12 per cent or six per cent, with more than 50 per cent
of the items to be taxed at 12 per cent or 18 per cent,” says a report by The Indian Express.
Update as on September 27:
The draft Goods & Services Tax (GST) rules were on September 27 put up for discussion ahead of a meeting of the Centre and states on September 30 to discuss the GST regulations. The finance ministry has reportedly sought a feedback on the draft rules, which are related to registration, invoicing, procedures and guidelines, by September 28.
“The draft rules for registration, payments, invoice, etc, for GST are uploaded on CBEC website. The business community may view them and give quick comments, if any, by 28th night on email@example.com. We intend to have these rules approved by GST Council in its meeting on 30th September. So that business systems can be modified by all,” said Revenue Secretary Hasmukh Adhia in a series of posts on microblogging site Twitter.