Goods and Services Tax (GST) - ‘Boon or Bane’ for Real Estate Sector By CS Ekta Maheshwari



In the recent years, the Real Estate Sector has shown a phenomenal growth in Indian Economy. Real Estate (Regulation and Development) Act, 2016 has been deliberated for number of years and finally became effective from May 1, 2017. Like any other Sectors, GST which is all set to be implemented on July 1, 2017 has also an impact on Real Estate sector.

The real estate sector is estimated to account for about five per cent of India’s gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from 2015.


In this write-up, the implication of GST on Real Estate sector has been covered.

Pre- GST

Presently, there are following taxes which are applicable in Real Estate transactions, namely:
  • Service Tax- On purchasing, a developer have to charge service tax and deposit it with Central Government.
  • VAT- On purchasing, additional VAT has to be paid. Developer used to charge this VAT and deposit it with State Government.
  • Stamp Duty and Registration fees - Stamp duty rates vary as it is charged by State Government.
A home buyer has to pay all the above taxes on purchase of residential units when booked prior to their completion and also there are various other non- creditable tax costs like excise duty, entry tax, customs etc. to be paid by developer on his procurement side, which is inbuilt into the pricing of the units. All these tax costs add upto approx 22% - 25% of the price of the units. Overall, the current taxes on home purchase are not low and involve mind - blogging complexities.

Post-GST

After the implementation of GST, both Service Tax and VAT will be subsumed and replaced with Central GST and State GST, whereas Stamp duty and Registration fees remain unchanged as it is out of the purview of GST. Incidentally, if you are buying a ready to move-in property directly from developer after he has obtained Completion Certificate from Authority, you need not pay service tax and VAT hence saving 3.75% to 9% of property cost depending on state where you are buying property. Since buyers are not liable to pay any indirect tax for the purchase of ready-to-move-in properties, the impact of GST on buyers of resale properties is likely to be very little.

From Developer’s point of view

Presently, there are many taxes and duties that a developer pays on the procurement side, such as Customs duty, Central Sales Tax, Excise duty, Entry tax etc. Since, GST proposes to roll multiple taxes into one. This will bring more liquidity into the market and boost home sales and also there will be flow of credit and; moreover; it is expected that GST rate would be between 12% to 18%, which will reduce the cost of production for Developers, so in that way Developers are expected to get benefit.

From Buyer’s point of view

Various taxes such as Excise duty, Entry tax etc. are subsequently passed on to the final pricing of the units and, thereby, to the buyer. After implementation there will be no multiplicity of taxes, in that way homebuyers are expected to get benefit.

Taxability in GST Regime

In terms of Schedule III of CGST/SGST/UTGST laws sale of land will be treated neither as supply of goods nor a supply of services.

However, all construction service/works contract service undertaken in India will be subject to GST, (unless otherwise exempted as may be specified in the notification).

For purchase of under-construction property, developer will have to charge GST where the space is sold before obtaining completion certificate wherever required or before first occupation (clause (b) of paragraph 5 of schedule II).

However, supply of any property other than above (i.e., ready-to-move-in property after obtaining Completion Certificate) will not be GST.

In terms of Schedule III of the GST law, sale of land (and subject to clause (b) of paragraph 5 of schedule II) sale of building shall be treated neither as a supply of goods nor a supply of service.

Conclusion

The major challenge for Real Estate Sector is multiplicity of various Indirect Taxes. Since, the GST is to subsume multiple indirect taxes, it will simplify tax compliances and minimise the scope for double taxation. Indeed, the GST will be a Game Changer for Indian Economy. But it's early to conclude that whether the GST will be a Boon or Bane for the Real Estate Sector as there is still no clarity on the tax structure applicable to the real estate and the construction sector under the Goods and Services Tax (GST) regime. However, the impact of GST on Real Estate Sector can vary from state to state due to divergences in current tax structures.

Hope this information will help you in your Professional endeavours.

For further assistance/query, feel free to write to us.

Author: CS Ekta Maheshwari is the Author of this article and is Company Secretary by Profession. The Author can be reached at csektamaheshwari14@gmail.com
 
Disclaimer:

The entire contents of this article is solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. It doesn’t constitute professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify and confirm the latest updates from the genuine sources before acting on any of the information’s provided herein above.
 

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