GST on Real Estate: How will it impact Home Buyers
and the Industry?
The GST Bill was approved in the Lok Sabha on March
29, 2017 with four supplementary legislations- The Central GST Bill, 2017; The
Integrated GST Bill, 2017; The GST (Compensation to States) Bill, 2017; and The
Union Territory GST Bill, 2017, will subsume central excise, service tax, VAT
and other local levies to create a uniform market. GST is expected to boost GDP
growth by about 2 per cent and check tax evasion. States will have to pass
their State GST or SGST law that will allow them to levy sales tax after levies
like VAT are subsumed.
Impact of GST on real estate
The construction of a complex building, civil
structure, or a part thereof, intended for sale to a buyer, wholly or partly,
is subject to 12 per cent tax with full input tax credit (ITC), subject to no
refund in case of overflow of ITC. In other words, residential construction
services, will invite GST at the rate of 12 per cent, which will apply to
developers selling residential units before completion of construction to the
home buyers.
According to the JM Financial report on GST, for
states with non-composite VAT (Karnataka, Tamil Nadu, Andhra Pradesh), the
transaction value changes marginally from 10-11% to 12% under the new regime.
With input cost credits available, developers in these regions may witness
improvement in margins in case no price revision takes place (subject to the
anti-profiteering clause).
Abhishek Anand, assistant vice-president (Equity Research), JM Financial Ltd, explains: “In the current regime, states with composite VAT require developers to pay lower VAT rates on the total property value without any input tax benefit (Maharashtra, Haryana) or partial benefit (intra state offset- Bangalore). Under this regime, developers pass on the transaction cost – VAT (1%) and service tax (4-5%) to buyers (total 5-6%). Developers get offset for only the input service tax component. In the GST regime, the transaction cost increases to 12%, with input credit available on both, services and material. Property transaction costs will increase by 6%, in case no input credit is passed on by developers. If developers pass on the input credit to buyers, the property price increase could be restricted to 1-2%.” If the developers pass on the credits completely and bring down the base prices, then, home buyers may marginally benefit under the GST regime.
Nevertheless, stamp duty will continue to be
applicable, irrespective of whether the property is under-construction or constructed,
in the pre-GST and post-GST regime.
Will GST help home buyers?
With the introduction of the Goods and Services Tax (GST), the total incidence of tax will increase from 5.5 per cent to 12 per cent. However, developers will be able to avail of input credit, on all the goods and services purchased and spent in the construction of the property.
Shrikant Paranjape, president of CREDAI Pune Metro,
maintains that “The impact of the GST on property prices, will be difficult to
gauge at this stage because of the lack of clarity on abatement for land value.
In a product, where the major raw material is not covered by the GST and the
completed unit is also not covered by the GST, the tax input benefit will be
hard to calculate or justify. Only the market forces, the ready reckoner rates
and time, will decide whether and how much benefit will be passed on by the
developers to the purchasers.”
Moreover, the prices of input materials can also be
volatile. Cement and steel prices can soar, without warning. Similarly, sand is
always in short supply and not available in the monsoons. Hence, it is likely
that these industries may not pass on the entire
benefit of tax credit.
Another important factor that needs to be examined, is the stage of construction. If the project is at an advanced stage, where substantial cost has already been incurred before the application of the GST, very little input credit will be available and very less benefit will be passed on. If the project is at an early stage, more benefits can be passed on.
Written By:
Gaurav Hooda
IV Year
Disclaimer: The views and opinions expressed in the article are those of the author and do not necessarily reflect the views and opinions of the Blog.
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