The real estate sector is estimated to account for about five per cent of India’s gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from 2015.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 duty and registration fees.
With the launch of GST ‘how it works’ might already be on your mind. Since the GST is to subsume multiple indirect taxes, it will simplify tax compliance and minimize the scope for double taxation. So, there is clear reason for home buyers to cheer, even if they have to pay slightly more in case the standard GST rate is high.
Impact of GST on real estate
On how GST will impact the real estate sector, Ankur Dhawan, Chief Business Officer (Resale), PropTiger.com, says: “GST itself is expected to add about two per cent to India’s gross domestic product (GDP). That is a substantial boost to the economy. If the economy does well, obviously, there will be more demand for real estate, and it will be a boost for the sector.”
- Currently, the sale of land and buildings have been kept out of the ambit of GST but it is expected to be taxed within a period of a year. Construction of land and building will benefit from the rates declared for cement, bricks, and iron under GST.
- Cement will be taxed at the rate of 28% under GST. Iron rods and pillars used in the construction of buildings is charged at the rate of 18%.
- Bricks used in the construction of buildings and houses is taxed under GST at the rate of 28% except for the rate of ceramic building bricks which is kept under 5%. Logistics cost of transportation of bricks, cement or iron is going to reduce through the subsuming and streamlining of taxes.
- Landlords, too, have nothing to worry about GST on rent. Those who are earning a rental income by letting out their properties for residential use will not be taxed under the GST. However, those who have given their premises on rent to be used for commercial or industrial purposes will have to pay an 18 per cent tax in case they are earning over Rs 20 lakh annually.
“Rental income received from residential house is exempt. But, if you have given your unit to commercial enterprise, it is taxable if you are getting more than Rs 20 lakh as rent,” said Revenue Secretary Hasmukh Adhia.
- Since the GST is actually expected to bring down the project cost for developers, this would mean homes would, in fact, become cheaper.Moreover, the increase in tax is very less for major inputs. The indirect taxes on steel were around 17 per cent and that has now come to 18 per cent under GST, similarly for cement the taxes totalled to nearly 24 per cent which now has been standardizedat 28 per cent.
- Since buyers are not liable to pay any indirect tax for the purchase of ready-to-move-in properties, the impact of GST on buyers of resale properties is likely to be very little. In the case of under-construction property transactions, buyers had to pay VAT and service tax. While VAT is a state levy and its rate differs from one state to another, service tax is a central tax charged at 15 per cent.
- Most buyers of under-construction properties take home loans to fund their purchase and the whole mathematics involved in the home loan process is quite baffling, too. In most cases, buyers do not carry out a detailed study of the various taxes that they have to additionally pay and they make their investment plans based only on the value of the property.The benefits of investing in under-construction properties will outweigh the benefits of investing in ready-to-move-in homes under the new Goods and Services Tax (GST) regime. The actual GST rate on under-construction properties is 18 per cent. However, the effective tax on such properties would be 12 per cent as under the new regime developers will be allowed input tax credits.
- For infrastructure projects under implementation also, the GST rates could result in an increase in cost, if there is insufficient built in contingency factor and limited scope for contract renegotiation, according to ICRA.
“However, since under the GST regime, there is credit available for input taxes paid, it can counter-balance the higher GST rates. Thus the higher GST rates should get neutralised if the contractor passes on the benefit of higher input tax credit available to them.”it said.
In Real estate sector, there is a huge percentage of each project expenditure going unrecorded on the books previously . GST will cut down this percentage due to cloud storing of invoicing. Real estate sector will also benefit with new tax law having a positive effect on all ancillary industries.
The GST rate for work contracts has also been fixed at 12 per cent.The impact of GST on real estate sector is expected to be neutral under GST. Though still, there is going to be a substantial benefit from GST as it will bring a lot of required transparency and accountability. Developers/Contractors would reap the benefit of many taxes which will be subsumed by GST.
“Real estate sector should be happy with GST even if the rate declared is higher than current rate.”