The long pending GST (Goods and Services Tax) Act, hailed as the most important indirect tax reform in the history of independent India, is most likely to become operational from April 1, 2017. Levy of Goods and Services Tax will be on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by the Central and State governments.
Presently there are a number of taxes differently levied by the Central government and each State/Union Territory, sometimes numbering to 15 and more, such as central excise, service tax, state value-added tax (VAT), entertainment tax, octroi, entry tax, luxury tax and purchase tax. In the GST regime, there will be a single tax, which will avoid double taxation and facilitate a common national market.
The impact of GST on real estate sector will be largely beneficial as all construction materials including cement, steel, sand, flooring materials, electrical and plumbing fittings and fixtures are going to be cheaper by 5-10% depending on the GST rate, which is yet to be fixed. Since the transport sector is expected to get the maximum advantage of lesser taxes and easy movement of goods across States, the construction cost is expected to come down significantly.
But when it comes to real estate, the media has been reporting that the GST regime may usher in higher taxes, as the real estate sector (construction projects) comes under GST (tax which may be 18% and above), States will continue to levy stamp duty charges (which varies from 5-8% of asset value) and registration charges and thus property prices may increase.
Effect of GST on different real estate transactions
Sale of constructed (immovable) propertyIn case of sale of ready-to-occupy property, GST will not be applicable as the term ‘goods’ as defined under the Model GST law includes every kind of movable property. Hence, sale of property after construction (i.e., immovable property) should be outside the ambit of GST. It may be noted that stamp duty on the sale of immovable property and registration costs would continue to be levied.
While constructing the property, on purchase of construction materials, the builder has to pay GST, along with applicable GST on services availed for construction.
In the present taxation regime, on the sale of built immoveable property there is stamp duty; and on the procurement side, there are non-creditable taxes (like VAT, excise duty, octroi etc).
As per the new law also, the GST would not be creditable and the builders/developers would have to load this in the price of the property.
Thus, if the GST rate is moderately higher also, it may not lead to increase in the sale price, as the builder/developer must have significantly saved on the construction and transportation costs.
One more advantage would be that the current multiple taxes on the procurement side would get replaced by a single tax .
Sale of under-construction propertyThe GST model law considers construction of property as works contract and as such treated as supply of service.
Hence, sale of under-construction property could be covered within the ambit of GST.
It is expected that appropriate abatement may be provided for the value of land and GST could be made applicable only on the cost of construction.
Minimum slabConsidering residential real estate, i.e. construction of houses as basic necessity, the GST rate could be fixed at 12%, the minimum slab recommended by the Arvind Subramanian Committee. But it is likely that for commercial constructions, the GST rate could be higher.
As GST will be applicable on the output side, credit of GST paid on the goods and services on the procurement side may be provided. In this context, there is a contentious clause in the model law, according to which credit of GST paid on goods and services acquired for construction of immovable property would not be available.
Looking at the rationale behind the concern and the provisions in the present tax regime, one can hope that credit of GST paid on the goods and services on the procurement side may be allowed.
Construction of property for leasingLeasing of immovable property is expected to come under service in the GST regime and would accordingly attract GST.
In the present tax system, leasing of immovable property for commercial purposes attracts service tax whereas leasing for residential purposes is in the negative list and does not attract this tax.
The same principle may be continued under the GST regime.
Based on the fact that the real estate sector, on the economic front, is seen as ‘growth engine’ and on the social front, offers hight employment opportunities and involves providing shelter to shelter-less people, it is hoped that the ambiguities in the model GST laws and the disadvantages as interpreted will be clarified/rectified by the law-makers.
And one can hope that GST, along with the Real Estate Regulatory Act, which will become operational shortly, will usher an era of win-win situation for all stakeholders in the real estate sector.
The author is Founder Director of Institute of Home Finance, Bengaluru, and can be contacted at deshpanderp2007@gmail.com
