Impact of GST on Real Estate

Posted on 22nd February 2019 Author: Planet Homes

Our previous blog discussed how the interim 2019 budget affected the real estate. In subsequence, another event that marked the largest chain of changes was the tax levied by Government as a replacement of VAT and Service Tax. This tax is known as the Goods Service Tax or GST.

Before you understand how this new tax reform has impacted the real estate market, let’s shed some light on what GST is and why was it brought into practice the first place. GST in simple words, is an indirect tax levied on the supply of goods and services. GST has replaced many indirect tax laws that previously existed in India.

The long awaited GST was introduced and made official on 1st July 2016 in India. GST also known as the Goods Service Tax, came as a fine alternative to the multiple taxes applied on all types of goods and sectors. This culminated business into paying only one final tax.

GST overturned the entire tax system for the market, bringing in its own pros and cons for some. But in actuality, it has emerged to be a successful tax implementation. While discussing the effects of GST, it has been keenly noted that the real estate sector has been impacted quite largely, with some of the effects described as follows:

Impact on Home Buyers

Earlier, buyers had to pay tax according to the condition on the property, whether the property was under construction or fully constructed.

The buyer had to pay the VAT and service tax for the property under construction, while the property which was completed, was exempted from the VAT and service tax. In both the cases, it was obligatory for the buyer to pay the stamp duty & registration charges.

While the area of the property also mattered in deciding VAT and service tax, the taxes levied varied from state-to-state.

But post the introduction of GST, tax was applicable on the overall purchase price. All properties under construction were charged at 12 % of the property value. This excluded the stamp duty and registration charges. For completed properties, the earlier provisions continued and buyers had to pay no indirect tax on the sale of ready-to-move-in properties.

Impact on Developers

Pre GST, developers were liable to pay customs duty, central excise duty, VAT, entry taxes, etc. on construction material costs. They also had to pay a 15% tax on services like labour, architectural fees, approval charges, legal charges, etc. Eventually, the buyer has to face this burden of tax.

With the induction of GST, however, the changes in construction costs are not as difficult. For instance, cement will now be taxed at a rate of 28% under GST. A lot of additional taxes charged over the average rate will now be subsumed under GST. Iron rods and pillars used in the construction of buildings are now charged at the rate of 18%, which is less than the previous average rate of 19.5%.

Furthermore, the logistics costs were also reduced. All this is expected to bring down the project cost to the developers, and the developers will have to pass on the benefit of the price reduction to the buyer.

Prior to GST, a huge percentage of each real estate project expenditure went unrecorded in the books. GST will help in cutting down this percentage due to cloud storage of invoicing. The real estate sector will also have a positive effect on all ancillary industries since this sector has a stimulating demand for more than 250 supporting industries.

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