Impact of GST On Real Estate

Amit Ruparel, Managing Director, Ruparel RealtyThe Goods and Services Tax (GST) is beyond doubt the most revolutionary tax-related reform to be seen in India in several decades, since it will eliminate the conflicting and cascading taxation structures which have confounded several industries over the past few decades. It will most certainly have a profound effect on India's economic prospects.

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.

Under-construction real estate for sale purposes will attract GST at 12 percent. This likely to be tax-neutral to slightly negative depending upon states'prevalent service tax and VAT rules. For commercial leases, the GST does not talk expressly about this service and hence it is covered under 18 percent tax rate with full input tax credit and this should turn out to be neutral for this sector.

The taxation earlier was too complicated for buyers. For instance, buyers were earlier liable to pay taxes depending on the construction status of the property and the state where it is located. Buyers also had to pay VAT, service tax, stamp duty and registration charges on purchase of an under-construction property. However, if the purchase was for a completed property, the tax applicable were stamp duty and registration charge. Furthermore, since VAT, stamp duty and registration charges were state levies, each state specified its own figures. Service tax was a central levy and was charged on construction. So the calculation of taxes was very tedious in the earlier regime. GST charges all under-construction properties at 12 percent of the property value. This excludes stamp duty and registration charges. No indirect tax is applicable on sale of ready-to-move-in properties; hence, the tax will not apply to those. The biggest takeaway is that GST is a simple tax that applies to the overall purchase price.
A developer could take input credits on sale of under construction property against the taxes that are paid by the buyer. Earlier, VAT and service tax used to account for nearly nine percent of the ticket price of the property. Since that will be lower than the GST applied to the sector, the builder will have to pass on the benefit of the price reduction to the buyer. The price reduction is on account of the input tax credits that the builder enjoys.

Real estate has already experienced loss and lag after demonetization and in the current setting is expected to suffer further

If you are a developer, you were earlier charged for Central Excise Duty, VAT and entry taxes collected by the state on construction material costs. Further, you had to pay a 15 percent tax on services like labout, architect fees, approval charges, legal charges, and others. Your tax burden was transferred to the buyer eventually. However, under the new regime, the changes in construction costs are not grave. Further more, reduced cost of logistics will result in reducing expenses as well. The input tax credits will also help you increase profit margins and it will be a simpler tax to work with. The affordable housing sector, which is a major thrust area of the incumbent Government, will not be impacted by GST.

This has been clarified by the announcement from the Finance Ministry, which indicates that there will be no tax under GST for housing projects which come under the affordable housing scheme. Sales are not just impacted by tax rates but also by sentiment, and also on account of the trust deficit which the Real Estate Regulation & Development Act -or RERA- now seeks to address. That said, if costs do go higher under GST, the lower prevailing current home loan rates could assuage the impact to some extent.

Other doubts pertain to the rental housing market, which would naturally be impacted if the Government were to tax residential leases under GST. The common apprehension is that if this were to happen, the rental housing segment may see a huge slump over the medium-term, since residential leases are currently not taxed at all.

Real estate sector has implications on developers, buyers encompassing cost of land, material and building cost. The cost of materials in the course of GST has undergone some minor changes like cement, paints and plasters to be taxed at 28 percent while iron material at the rate of 18 percent, building houses with high quality material may alleviate the overall cost as most of the materials fall in the 28 percent tax category. Also the service charge given to the realtor for assistance in buying or selling the house, which is 15 percent now will considerably rise to 18 percent with GST.

Real estate has already experienced loss and lag after demonetization and in the current setting is expected to suffer further,as the cost of purchasing new houses would be increased by eight percent which consequently reduces the demand in real estate by 12 percent.

However, another problem that concerns the realtors is that of compliance as they are required to file the returns thrice a month. This makes the filing of returns both tedious and difficult for businesses with less number of accounting professionals. Realtors also look forward to a legal mechanism to deal with protection against defaults.