GST

How GST has Changed the Real Estate Sector?

GST, a revolutionary tax reform rolled out on the 1st of July 2017, has effectively replaced the previous multiple taxes like VAT, central excise duty, commercial tax, service tax, octroi, etc. It has a great impact on the real estate sector since it was first launched. This article is describing GST on Real Estate Sector.

In the below article, we will discuss how GST has completely given a new lease of life to the real estate sector. But before moving ahead, let us discuss what real estate actually is

What is Real Estate and what does it include?

Any land and anything which is fixed, immovable or permanently attached to the land like buildings, fences, fixtures, improvements, roads, shrubs, and trees but not the growing crops, sewers, structures, utility systems, and walls.

The real estate sector contributes nearly 30% of the employment in India after the farm sector. Housing or real estate sector is expected to grow more and touch new heights by 2020.

SEBI has given approval and introduced the Real Estate Investment Trust Real Estate (Regulation and Development) Act.

What was the position of Real Estate Sector in earlier tax structure?

Earlier when the old tax structure was applicable, then when the property under construction was purchased, the purchaser was subjected to the payment of VAT, service tax, stamp duty^[1], and registration charges and property purchased after completion were exempt from VAT and service tax, and only stamp duty and registration charges were payable.

What changes you could expect from GST on Real Estate Sector?

GST brings much transparency in terms of the functioning of the Real estate sector.

• It will reduce the cost of buying houses for buyers as in the previous tax regime; they used to pay Service Tax and VAT on the purchase of residential premises when booked prior to their completion.
• On the other hand, Developers had to pay excise duty, customs duty, CST, Entry tax which is non-creditable tax cost which was ultimately included in the price of units.
• With the uniform and single tax rate, developers will have input credits on GST paid for services and goods purchased by them which will reduce the cost for them and can be passed on to the buyers.
• After the implementation of GST, the government has not included the stamp duties under it.

Now let us try to understand what would impact would it have if you are a buyer and if you are a Developer/Builder/Contractor.

Impact of GST on Buyers

As discussed above, under the earlier tax structure, buyers used to pay VAT, Service tax, Registration charges & Stamp duty on the purchase of properties under construction. Also since VAT, Registration charges & Stamp duty were imposed and levied by the respective States. Hence, the prices of properties varied from state to state.

Developers also had to pay various duties like sales tax (CST), customs duty, Octroi etc. for which credit was not at all available.

On the other hand, under GST, a single tax rate of 12% is applicable on properties under construction while GST is not applicable on completed or ready to sell or move properties which were the case in earlier tax law. As a result, buyers will largely get many benefits from the reduction of prices under GST.

Impact on Developers / Builders / Contractors

Earlier developers had to bear Excise duty, VAT, Customs duty, Entry taxes etc. on raw materials/inputs and Service tax. Additionally, the following charges like approval charges, architect fees, labour charges, legal charges etc. were also applicable. The real estate developers were thus faced with multiple challenges which would thus impact the pricing and subsequently the burden was transferred to the buyer.

Under GST, while there might not be any significant changes in the overall tax rates but the elimination of the tax on tax will ultimately bring down the final cost of construction. As a result, it will help in bringing down the price of housing units which will ultimately boost the real estate sales. This would be a positive impact of GST on real estate developers.

A Positive Change: Lower costs of Logistics

Also, the reduction in the cost of logistics will be an added benefit due to which developers may see improvement in margins. Under GST, the need for multiple warehouses will go down greatly, which were being set up more for compliance rather than for operational efficiencies which will ultimately result in lower transportation and logistics costs.

What are the challenges which are currently faced by the Real Estate Stakeholders?

The challenges which are generally faced by the real estate stakeholders are:

• Complex tax slabs
• The people are facing hurdles in the deployment of staff for supporting IT infrastructure
• It is still a little confused about the integration of Input Tax Credit (ITC), and
• There is no or lack of clarity on the rules and regulations under the anti-profiteering clause which was incorporated to pass on the benefits of ITC to end-users.

In line with its ‘One Nation, One Market, One Tax’ philosophy, the GST reform will definitely benefit the Indian economy in the long run. As the realty sector becomes more streamlined on the back of GST and other landmark reforms such as RERA, investor and consumer sentiments will become more positive and which will further strengthen the entire system in the nearby future.

In case you are also the one who is facing problem in understanding GST, contact Enterslice now.

What are the current GST rates on real estate?

Generally, properties are divided into three categories:

(1) Under Construction Property,

(2) Ready to move property and

(3) Rented property.

It is to be noted that the effective tax rate on real estate was around 15% to 18% before the implementation of GST.

GST on Under Construction Property

The rate of GST is 12% on under-construction properties.

GST on ready to move Property

It is to be noted that GST is not at all applicable on ready to move property and resale property. However, Stamp duty 4.9% and 1% registration charges will continue to be applicable, irrespective of whether the property is under construction or constructed. Stamp duty cannot be avoided. In the case of women, 1% registration charges will be NIL if a property is purchased on her name.

GST on Rental

GST on rent is taxed @18% of the rent paid. However, GST is only applicable to renting of commercial property and is not applicable in the case of renting residential property.

Note: GST of 8% is applicable on housing projects in the affordable segment, such as – Jawaharlal Nehru National Urban Renewal Mission, Rajiv Awas Yojana, Pradhan Mantri Awas Yojana or any other housing scheme of State governments etc.

Conclusion

There seems to be a bright future and a positive impact of GST on real estate developers on the whole. The government is trying its best to organize the country by creating transparency in every segment, including the real estate sector. The real estate sector somehow has benefited from the above policy reforms as discussed, as it has given buyers the confidence to invest their money safely in properties, which will last for generations.

The author is expertise and a Lawyer by profession. For more information or help on the above article, contact Enterslice which has a team of professionals to guide you.

Read our article:Reverse Charge Mechanism under GST: Buying from Unregistered Dealers