The Goods and Services Tax (GST) is a comprehensive indirect tax on the manufacture, sale and consumption of different kinds of goods and services throughout India, with all other Central and State taxes intended to be subsumed under it. If this happens, it has far-reaching implications, including on real estate.
Taxation and real estate industry
If we take a look at the real estate industry in India today, we find that there have been major tax changes in the last few years. However, these taxes are not uniform all over the country – different practices and regulations are followed in different states in India. It was the 46th Amendment to the Constitution that brought massive changes towards taxation in the real estate sector. In the following years, special powers were given to state governments for implementing Value-Added Tax (VAT) on specific kinds of transactions.
For land, property and other kinds of work contracts, different taxes are levied by State Governments and the Central Government. Transactions are mainly categorized into three parts – value of services, value of goods and materials and value of land. VAT is applied by the State Government on the goods portion, while value of services is taxed by the Central Government. However, other than stamp duty, there is no clear tax on transactions regarding value of land. This situation leads to confusion and can result in dual taxation. Compliance and implementation of such taxes also get difficult.
The real estate industry has justifiably been feeling jittery with confusing tax implantations and calculations. For one real estate transaction, multiple taxes need to be paid and this has a negative effect on the industry. The industry’s demand to bring GST on board is primarily to get a clear and transparent taxation rule for the real estate sector in India.
Expected GST effects on realty industry in India
- The implementation of GST can be a significant step in reforming indirect taxation in India. Chances of double taxation will be diminished, as some of the Central and State Government taxes will be amalgamated into one tax. This will ease the process of taxation considerably, making its enforcement and administration easier and simpler.
- In the current situation, a builder or a real estate developer incurs various kinds of expenses during the construction phase of a project. Different kinds of taxes are involved with these expenses, such as VAT/CST, customs duties, service tax, excise duty and so on. Majority of these taxes are expenses included in the system because they are not creditable to the developer or to the end customer. These non-creditable expenses lead to tax inefficiency.
- One positive impact that might result from GST is doing away of restrictions on credit utilization. This will definitely help in strengthening the credit chain in the entire system. If property developers and builders can properly manage this aspect, they will see some profit.
- The proposed GST structure is expected to have a progressive and streamlined approach. Tax compliance rules should not have any serious impact on real estate builders and developers. In present conditions, builders running projects in different states have to comply with State-specific VAT laws, as well as other kinds of service taxes. Bringing in GST will therefore not bring any additional compliance burden on real estate builders in the country.
Issues regarding GST which affect real estate builders
Real estate developers need to seek a few clarifications for GST taxation. For instance, the definition of a real estate developer varies from one state to another in India. The composition scheme varies as per the State, in which VAT rates vary between 1 – 5%. In some states, there are differences between real estate contractors and real estate developers. If the terms have different meanings, the industry needs to understand implications of GST.
There might be some confusion regarding GST implementations on residential property, as well. In the present scenario, there is no service tax applicable on renting immovable property, particularly for residential purposes. But service tax and VAT is implemented on construction work. The question arises whether the proposed GST will offer differential tax for residential properties.
As of now, it does not look like completed residential projects will be affected by GST, as buyers into completed projects have already paid statutory charges such as stamp duty and registration charges on the transaction. The segments to watch on the GST front are under-construction flats and rental flats, which are expected to come under the ambit of GST. GST will apply to the materials that a developer procures for building a residential project, so there is a direct correlation to overall cost of construction.
Much depends on what rate of GST will finally be confirmed. If it is more than the existing cumulative taxes currently in force, it means that the overall cost to consumers of buying an under-construction flat will increase along with the added cost of stamp duty and registration. At the same time, developers have to keep an eye on costing, as price competitiveness is very important in the current real estate market scenario.
