Impact of GST on real estate; will new tax regime be able to regulate it?

The Good and Services Tax (GST)--a revolutionary tax regime envisioned to reduce tax evasion, make laws easier and remove unnecessary hurdles-- completes one year today to realise the aim of the present dispensation seeking to transform India with “One Nation, One Market, One Tax” principle. The new tax regime subsuming central excise, service tax, VAT and other local levies to create a uniform market is expected to boost GDP growth by about 2 per cent. 

Since the real estate sector is considered the largest employer in Indian economy after agriculture, contributing an average of 5-6 percent to the GDP, this sector is expected to witness a growth of staggering $180 billion in revenues by 2020, therefore, provides major tax base for the government. The sector bought under the purview of GST was earlier burdened by various indirect taxes such as VAT, Service Tax, excise, stamp duty and registration fees, but confusion still prevails regarding rates and benefits under the new tax regime. 

Let’s try to understand certain factors related to pre-and post-GST implementation on real estate, and how far the new system will be able to facilitate the things for builders/developers as well as common people/buyers. Prior to implementation of GST, real estate has been alleged to have exploited ambiguity in provisions as well as multiple taxation, but with the simplification of taxation compliance things are expected to change. 

In the earlier practice, developers were liable to pay customs duty, central excise duty, VAT, entry taxes, etc. on construction material costs, besides paying a 15 percent tax on services like labour, architect fees, approval charges, legal charges, etc., and this tax burden was ultimately transferred to buyers. The developers did not strictly adhere to maintaining records or books, despite spending a huge percentage of each real estate project expenditure. GST is likely to cut down this percentage due to cloud storage of invoicing, thereby, benefit developers along with extending a positive effect on all ancillary industries as the real estate is stated to have a stimulating demand for more than 250 ancillary industries.

According to experts, under the new regime, changes in construction costs are not as difficult. For instance, cement is being taxed at the rate of 28 percent--which is stated to be higher than the current average tax rate of approximately 23-24 percent---but a lot of additional taxes charged over the average rate will now be subsumed under the new tax. Iron rods and pillars used in the construction of buildings are now charged at the rate of 18 percent, which is less than the previous average rate of 19.5 percent. Further, the reduced cost of logistics will result in a reduction of expenses as well, say some experts. 

Further, the most important aspect is related to input tax credits, which is likely to help in increasing profit margins, real estate experts say. A developer will now be entitled to take input credits on the sale of property under construction against the taxes that are paid by buyers. Taken together, this is expected to bring down the project cost, and developers are expected to pass on the benefit of the price reduction to buyers, therefore, reduction in price of property.

Notably, an Input Service Distributor (ISD) concept has been proposed under the GST for transferring the tax credit of input services between two or more locations. Any supplier of goods or services can be considered an ISD, who can transfer credit for all types of GST, including CSGT, SGST, or IGST, and he 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, said avalara.com report, adding assessee of a reasonable size having ISD facility will have to file 61 returns in a year.

Under the GST, the real estate sector will invite 12 per cent of tax rate with full input tax credit. According to the schedule of GST rates for services as approved by the council, real estate sector will comprise “construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. The value of land is included in the amount charged from the service recipient.” 
For under-construction properties, there are still some variations and things are not easy to understand. It may be noted that there are many stages for under-construction properties. For example, if you have bought a property after the completion certificate was issued to the builder, GST will not be applicable in such a situation, as it is considered a ready-to-move-in property and there is no transfer or supply of goods and services.

Watch this Zee Business video

GST on under-construction flats or on properties or commercial properties stands at 18 per cent, but one-third of this 18 per cent is considered as the value of land or undivided share of land supplied to the buyer of the property. The GST rate here lowers down to 12 per cent on under-construction flats, properties or commercial properties with full input tax credit. However, in case of resale properties or flats, buyers need to pay GST as such properties are considered ready-to-move-in properties.

But houses purchased under the Credit-Linked Subsidy Scheme (CLSS), meant for affordable houses to lower and weaker sections of society, the GST rates will be 8 per cent and not 12 per cent as one-third will be deduction towards the cost of the land.

Now the question arises as to how the new tax regime will benefit builders as well as buyers. If we look at existing practice, a builder pays various indirect taxes and duties while constructing a property - house or complex, and passes on this cost to buyers. With the roll out of GST, all these taxes have been combined into one, thereby, lowering the cost of property. Experts say it will henceforth boost sales. 

For buyers, GST at 12 per cent is on a higher side, but clarity and uniformity in taxation will create a faith and this may propel the sale of properties in a transparent manner.