With the Goods and Services Tax (GST) finally having come into force from 1st July 2017, there has been much speculation about how it will impact various industries and sectors.
Rumour mills are working overtime on the implications of one of India’s most major reforms. If experts are to be believed, the new taxation policy is bound to have an overall positive impact on all industries, including real estate. However, to be truly able to understand the impact of GST on the real estate sector, it is first important to gain some basic information about this new taxation policy itself.
What is GST?
GST is the short form of Goods and Services Tax, which was rolled out at midnight on 1st July 2017 by President Pranab Mukherjee and Prime Minister Narendra Modi. Based on the idea of “One nation, one market and one tax”, GST is expected the simply and streamline the complicated taxation process in India.
It is also expected to eliminate the conflicting and cascading tax structures besides making a host of indirect taxes redundant and replacing them with simpler taxes. It is due to these features that GST is being hailed as the most radical tax-reform to be implemented in India across several decades.
The biggest advantage of GST is that it will act as a single indirect tax to be levied on all goods and services. This will eventually not only help in bringing down the overall tax levels but also help to increase the tax collection rates gradually. The new taxation policy has been designed in a manner which makes it easier to implement and simpler for businesses and retailers to comply with its norms.
Talking specifically about the real estate sector, GST will have a direct impact on everyone involved, including buyers, sellers, builders, developers, and even financers and investors.
Impact of GST on real estate
The real estate industry accounts for about 5% of India’s gross domestic product and is also believed to be the second-largest industry in terms of employment within the country. The implementation of GST within the real estate sector is likely to bring significant transparency within the industry while minimising any unscrupulous transactions. It is expected to act as a sentiment booster for the industry and help revive the interest of both buyers and investors in this sector. The benefits currently enjoyed by the real estate sector within SEZ will also be provided within the GST. Also it will help to fill the major gaps that exist within the supply chain management process within the industry.
Benefits for buyers
Consolidation of multiple charges: Before the implementation of GST, the buyers of under-construction properties were required to pay a multitude of taxes:
- VAT
- Service tax
- Stamp duty
- Registration charges
- State taxes
While the service tax was charged by the central government, the stamp duty and registration tax were levied by the state government, and hence their value changed from state to state. This made the calculation of overall tax amount extremely complicated and even tedious.
What GST does: GST simplifies that process by charging a single tax of 12% of property value or under-construction properties. This is exclusive of stamp duty and registration charges. Also, ready-to-move properties are exempted from any indirect taxation.
Benefits for developers
With the implementation of GST, developers no longer need to pay taxes such as Central Excise Duty, VAT, entry taxes collected by different states on cost of construction material as well as the 15% tax charged for labour services, architect fees, approval charges, legal charges, etc.
What GST can do: With GST proposing to roll up these different taxes into one, the cost of construction is expected to come down which will, in turn, increase the market cash flow and increase the free flow of credit for developers.
According to a report, GST will subsume 16 major taxes and levies that the developers were required to pay into a single consolidated tax. This will eliminate the practice of double taxation and also increase the profit margin of the developers without them feeling the need the need to pass on the burden of increased prices to buyers.
A final word
The biggest impact that GST is expected to have on the real estate sector is to bring in greater transparency and accountability, which at present is almost non-existent. The buyers, as well as developers and contractors, will be able to benefit significantly from the consolidation of different taxes under GST, making the overall taxation process extremely simple and hassle free.
I would like to understand how it is good for “buyers” when the taxes have increased from 12% from 4.5% previously. It is a 3 fold increase! Can someone make me understand? And also, there is burden of paying registration and stamp duties separately.. + payment in cash at the sub-registrar’s office during registration without which you’re registration CANNOT happen! Please enlighten.
Great in-depth article. Impressive. Keep up with the great work!