GST – A positive development for Indian real estate sector

A revolutionary tax reform, the Goods and Services Tax (GST) will come into effect in India from July 1, 2017. With this move, different types of taxes—central, state and local will subsume into one single tax.

Like any other sector, real estate will also come under the ambit of GST. But, there’s lack of clarity on the rate of GST, whether it will remain at par with current applicable taxes or work towards enabling the government’s vision of ‘Housing for All’.

Other than the GST rate, the abatement rules as applicable under the service tax regime and the input tax credit facility for developers also play an important role. They will help determine if the effective tax incidence on real estate is lower or higher under GST.

The real estate industry, as of today has two primary levies, Service tax and VAT, with overlap of tax base and constant disputes on the rate of tax, given the multiple options available for discharge of taxes across States. This process has resulted in diverse practices being followed by developers, across geographies and even within each State.  With the GST regime, all these issues will be put to rest and the practices and positions will be common across India.  Hence, the taxes paid by a home buyers across various States would more or less be the same.

Presently, a home buyer pays service tax and VAT on purchase of residential units when booked prior to their completion. There are other elements of non-creditable tax costs, like excise duty, customs duty, CST, entry tax which are paid by the developer on his procurement side, building up into the pricing of the units.  All these tax costs add around 22%-25% of the price of the units.  GST implementation will replace the structure of multiple taxes with a single tax and ensure smooth flow of credits through the chain.  Hence, it is widely expected that GST would reduce the construction cost in the hands of the developer and aid in reducing or atleast maintaining the current level of prices in the real estate sector.

Highlights of GST for the realty sector

  • Under-construction homes to attract GST.
  • Leasing and renting of land and building would invite GST.
  • GST to be levied on EMI of under-construction property.
  • Tenancy and leasing would be considered as rendering the service under the GST bill.
  • Real estate to come under the GST ambit within one year of roll-out, which means stamp duties will continue to be levied till then.