As an industry that locks between 6-8% to India’s Gross Domestic Product (GDP), standing at par with the IT industry in terms of creating job opportunities, real estate is one of the strongest pillars of Indian economy. Recently, the industry has seen a spate of regulations that are making the sector more transparent and accountable. First RERA, and now GST coming into the picture, indirect taxation in this business is entirely revamped.
|Pre GST||Post GST|
|Multiple duties for developers (customs duty, central excise duty, VAT, entry taxes, etc. on construction material costs)||A single tax rate of 12% is applicable on properties under construction|
|A large percentage unrecorded expenditure||All the expenditure is recorded in the books|
|No concept of Input Service Distributor (ISD)||The concept of Input Service Distributor (ISD) is strong and mandatory, reducing a lot of additional costs borne by the buyer.|
Let’s take a look at how GST impacts various stakeholders of real estate.
Impact on Buyers
Prior to the implementation of GST in real estate, buyers had to pay VAT, service tax, registration charges and stamp duty on buying properties under construction. It’s important to note that since VAT came into being, registration charges and stamp duty were state levies and the cost of properties differed in accordance with the state. In addition, the developers had to pay myriad duties like sales tax (CST), custom duty, and few other taxes for which credit was not available.
However, after GST – a single tax rate of 12% is applicable on properties under construction – reducing the price for the buyer. GST is not applicable on finished or ready to sale properties.
Impact on Developers
From the perspective of a developer, before GST – there were a number of duties to bear such as the excise duty, VAT, customs duty, entry taxes and so on for raw materials and service tax on myriad services like approval charges, architect professional fees, labour charges, legal charges etc. Input Tax Credit (ITC) was unavailable for duties like CST, customs duty, entry tax etc. This practice was driving up the pricing and led to the developer passing the burden to the buyer.
GST has significantly reduced the developers’ construction costs. Due to the availability of input tax credit(ITC), multiple taxes and costs came down in addition to the fact that there is fall in the expenditure logistics leading to higher margins.
However, on the other side of the coin, getting Input Tax Credit (ITC) to pass on to the buyer is a tedious process. In most of the cases, it’s only in the final stages that ITC is transferred to the buyer. The less than clear process is also a hindrance, making buyers cautious about buying decisions impacted by new policy.
Impact on other industry partners
The impact on services like labour, material suppliers, service suppliers and so on is completely dependent on the rise or fall in the tax charged on these goods and services.
On the whole, the subsequent effect will seep down to the industry in the long run. Even though in the initial phase there are downsides, GST certainly is a step forward for real estate.