The Residential Real Estate Sector in the GST Regime
Jul 06, 2017 Real Estate News
There are a lot of assumptions and speculations being made about GST in the market. It is being looked at the biggest tax reform in post-independent India. The complex taxation system in the country will simplified after the implementation of GST on July 1, 2017. The various taxes levied by Centre and State like the central excise duty, commercial tax, octroi tax/charges, Value-Added Tax (VAT) and service tax will be subsumed under GST. This move will help in eliminating the previous tousled tax system by creating uniform rates and structures. It will make compliance easy and will also reduce additional tax burden on the customer. In other words, One Nation, One Tax is the philosophy around which GST is conceptualised.
A major transformation brought about by GST is the introduction of Input Tax Credit whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. Thus, GST is a tax on value addition at each stage. The end consumer will bear the GST charged by the last dealer in the supply chain only but will avail the set-off benefits at all the earlier stages. The anti-profiteering clause under section 171 of the GST law, will ensure that the manufacturers, developers and service providers pass on the benefits to the final customer.
In the Indian real estate sector, implementation of GST would prove to boost the interests of the home-buyers. The recently implemented Real Estate and Regulation Act (RERA) has also been made significant impact in bringing about transparency and accountability on the part of the real estate builders and brokers. These reforms coupled together, are bound to positively impact the real estate market in the favour of the buyer. In the short run, the impact of GST in bringing down the property prices might not seem instrumental. But in the long run, all the stakeholders in the residential real estate sector will benefit from the simplified tax structure and increased accountability.
The biggest advantage of GST is the simple and transparent tax applied on the purchase price. The under-construction properties would be charged 12 percent, excluding the stamp duty and the registration charges. In case of completed and ready to move in properties, there are no indirect taxes applicable, thus, GST would not apply.
In the earlier taxation system, the rate of VAT differed in every state. VAT and service tax together accounted for 7-9 percent of the price of the property, 3-4 percent lower than the GST rate. But the customers were largely unaware of how the VAT and service tax is calculated. With lack of information, the entire tax system was impossible for a lay person to understand.
For instance, the cost of a residential property has three components, land, material and labour or service cost. VAT is calculated on the cost of the material used. And service tax is supposed to be calculated on the cost of the labour and service. However, for a homebuyer it is impossible to calculate the breakup of the price components and the taxes. After the implementation of GST, the calculation of tax is simplified. The customer now has to pay only one tax and the builder is obliged to pass on the benefits of price reduction brought about due to input tax credit.
The government has put in a number of efforts in the affordable housing sector in the recent past in order to achieve the ‘Housing for all by 2022’ vision. As per the announcement of the Finance Ministry, the affordable housing sector will not be affected by GST. For housing projects under the affordable housing scheme there will be no tax applicable under GST.
The new tax regime will also benefit the real estate builders and developers. Previously, the developers also struggled with the complication of multiple taxes. The builders paid custom duty, central sales tax, excise duty and service tax on the construction material purchased, thus paying multiple taxes. The collective burden of this would inevitably be passed on to the end consumer. With GST, all the other taxes will be eliminated and the builder can enjoy the benefit of improved profit margins.
Tax rates of the main construction material have not been altered hugely. For instance, the earlier average tax on cement was 20-24 percent. Under GST, it would be slightly higher, 28 percent. The GST on iron rods and pillars would be 20 percent as compared to 18 percent earlier. Paint, wall fittings, plaster, wallpaper and ceramic tiles will be taxed at 28 percent, which is also similar to the previous average rate of 20-25 percent. Sand lime bricks and fly ash bricks will be taxed at 5 percent, which is lower than the previous rate of 6 percent. As the transportation and logistics cost will reduce due the new tax system, these marginal changes will impact the cost of construction hugely.
It can be concluded that in the long run, the buyer sentiment and the general perception of the real estate market will be positively impacted by the implementation of GST, while no impact can be seen in the short term. The builders and developers on the other hand will also find the new taxation system to advantageous with the benefit of input tax credit.
A major transformation brought about by GST is the introduction of Input Tax Credit whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. Thus, GST is a tax on value addition at each stage. The end consumer will bear the GST charged by the last dealer in the supply chain only but will avail the set-off benefits at all the earlier stages. The anti-profiteering clause under section 171 of the GST law, will ensure that the manufacturers, developers and service providers pass on the benefits to the final customer.
In the Indian real estate sector, implementation of GST would prove to boost the interests of the home-buyers. The recently implemented Real Estate and Regulation Act (RERA) has also been made significant impact in bringing about transparency and accountability on the part of the real estate builders and brokers. These reforms coupled together, are bound to positively impact the real estate market in the favour of the buyer. In the short run, the impact of GST in bringing down the property prices might not seem instrumental. But in the long run, all the stakeholders in the residential real estate sector will benefit from the simplified tax structure and increased accountability.
The biggest advantage of GST is the simple and transparent tax applied on the purchase price. The under-construction properties would be charged 12 percent, excluding the stamp duty and the registration charges. In case of completed and ready to move in properties, there are no indirect taxes applicable, thus, GST would not apply.
In the earlier taxation system, the rate of VAT differed in every state. VAT and service tax together accounted for 7-9 percent of the price of the property, 3-4 percent lower than the GST rate. But the customers were largely unaware of how the VAT and service tax is calculated. With lack of information, the entire tax system was impossible for a lay person to understand.
For instance, the cost of a residential property has three components, land, material and labour or service cost. VAT is calculated on the cost of the material used. And service tax is supposed to be calculated on the cost of the labour and service. However, for a homebuyer it is impossible to calculate the breakup of the price components and the taxes. After the implementation of GST, the calculation of tax is simplified. The customer now has to pay only one tax and the builder is obliged to pass on the benefits of price reduction brought about due to input tax credit.
The government has put in a number of efforts in the affordable housing sector in the recent past in order to achieve the ‘Housing for all by 2022’ vision. As per the announcement of the Finance Ministry, the affordable housing sector will not be affected by GST. For housing projects under the affordable housing scheme there will be no tax applicable under GST.
The new tax regime will also benefit the real estate builders and developers. Previously, the developers also struggled with the complication of multiple taxes. The builders paid custom duty, central sales tax, excise duty and service tax on the construction material purchased, thus paying multiple taxes. The collective burden of this would inevitably be passed on to the end consumer. With GST, all the other taxes will be eliminated and the builder can enjoy the benefit of improved profit margins.
Tax rates of the main construction material have not been altered hugely. For instance, the earlier average tax on cement was 20-24 percent. Under GST, it would be slightly higher, 28 percent. The GST on iron rods and pillars would be 20 percent as compared to 18 percent earlier. Paint, wall fittings, plaster, wallpaper and ceramic tiles will be taxed at 28 percent, which is also similar to the previous average rate of 20-25 percent. Sand lime bricks and fly ash bricks will be taxed at 5 percent, which is lower than the previous rate of 6 percent. As the transportation and logistics cost will reduce due the new tax system, these marginal changes will impact the cost of construction hugely.
It can be concluded that in the long run, the buyer sentiment and the general perception of the real estate market will be positively impacted by the implementation of GST, while no impact can be seen in the short term. The builders and developers on the other hand will also find the new taxation system to advantageous with the benefit of input tax credit.
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