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GST and its impact on Real Estate Sector

By Sarveshaa SB, Managing Director, Bhadra Landmarks

The Goods and Services Tax (GST) with a single indirect tax-structure has eliminated the complex and ambiguous tax structure across India.

The GST rate of 18% is applicable for under-construction properties with full Input Tax Credits (ITC) for the real estate sector but excluding the cost of land.

The proposal to replace several taxes into a common tax in the Union of India has been underway for long-period. Ultimately it has been introduced w.e.f. 1st July 2017. Now it is only GST all over India with only two subtypes i.e. State/Union Territory GST and Interstate GST charged at equal rates, half each of the GST rate.

Advantages of GST, the single tax:

GST rates are only four in the slab – 5%, 12%, 18% and 28% (there is cess in some cases like vehicles) in place of different rates of different taxes viz – VAT, Luxury Tax, Entertainment Tax, CST, Excise Duty, Service Tax, Import Duty, etc.

Input credit is available to set off the State tax with the Central tax and vice-versa unlike the earlier system where it was not allowed. Now there is only one return being filed in three stages in place of regular returns per each type of taxes earlier.

Stamp duty and registration charges are outside the ambit of GST, while property tax is a municipal levy. Although it is expected that these levies will eventually subsume into GST. (In many countries with GST, immovable properties are included.

The impact of GST on Real Estate / Construction Industry:

GST is 18% on the construction cost in place of 14.5% of 70% towards VAT and 15% of 40% towards Service Tax. Effectively there is an increase of 1.85% on construction cost.

GST is applicable to the extent of value additions / Sales taking place from 1st July 2017 and proportionate profits because the value added till 30th June 2017 or the amounts collected till that date entail VAT and Service Tax.

The impact of GST on Buyers:

The taxation earlier was too complicated for buyers. For instance, buyers were earlier liable to pay taxes as per construction status of the property. Buyers had to pay VAT, service tax, stamp duty and registration charges on purchase of an under-construction property. Since, VAT, stamp duty and registration charges were state levies, each state had different figures. Properties tax applicable for ready to move were stamp duty and registration charge. This was very tedious calculation in the earlier regime.

Under the ambit of GST, all under-construction properties at 12 percent of the property value. This excludes stamp duty and registration charges. The biggest advantage of GST is a simple tax that applies on the total consideration.

The multiplicity of rates in the previous regime had created a lot of confusion. Teething issues, inflationary pressures and certain short-term adverse impact may result in difficulties in the compliance for the first few months. The global precedence says that GST has been beneficial and leads to better economic transactions.