This year, the real estate industry in India is set to undergo major transformation with the implementation of the Real Estate (Regulation and Development) Act 2016 (RERA). Another significant change is the implementation of the Goods and Services Tax (GST) from July this year. Exactly how does GST impact the real estate in India? We find out.
Regulation of prices
Though there has been phenomenal growth in Tier 1, 2, and 3 cities, they have not been suitably supported by prices. GST will definitely help in price regulation in this sector.
Although construction services have already been taxable as per VAT for more than a decade, there have been intense litigations over taxability of joint development agreements, transfer of land development rights, and more. Immovable property transactions, or transfer through the sale of immovable property upon completion, would still carry on outside the realm of GST. However, the new GST regime will enable proper indirect taxation of real estate transactions.
Uniform tax structure
In the current scenario, homebuyers end up paying VAT and service tax for residential units, when bookings are made before completion. Other non-creditable costs such as customs duty, CST, entry tax, and excise duty are also incorporated into the final price. In total, these taxes are 22-25% of the home unit prices. Now what will happen from 1st July is that this amalgamation of taxes will be replaced by a single tax, ensuring smooth flow of credits throughout the chain.
Existing tax liabilities on homebuyers are likely to remain unaffected upon the introduction of GST. At present, a homebuyer ends up paying a number of indirect taxes, which include VAT, service tax and excise duty, amounting to 11%, exclusive of Stamp Duty. As per the new GST regime, indirect taxes will not be counted, and a uniform 12% for purchase of new residential property will be put in place, exclusive of Stamp Duty. It will apply to properties under construction but not on ready-to-shift-in apartments.
As per the tax structure, GST will help reduce construction costs, which are in the hands of the developers, thereby helping maintain or reduce current prices. However, the only bad news can be possible high GST rates (27% GST may become visible, as per news in circulation), which would offset any gains from incremental credits.
Impact of GST on commercial property developers
Over the years, commercial property developers have had to grapple with high costs, since credit was not available for developing commercial property for the purpose of renting out. Once GST comes into force, a smooth flow of credit and minimization of the unavailability of construction-related credits can be removed. This may bring down project costs, resulting in lower rentals.
GST, along with RERA, will help the real estate industry in taking massive strides in ensuring transparency. Multiple taxation issues, along with those of indirect taxes will now be forgotten. Due to the availability of a seamless all-inclusive channel, GST is also expected to benefit the NRI community, thereby bolstering foreign investment.
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