How GST Affects the Indian Real Estate Sector

Posted by Manisha Gupta
August 11, 2017


Before the Goods and Services Tax (GST) was implemented, there was a lot of doubt and uncertainty with regard to how the new One Tax principle of the government would change the game for the real estate sector. Now, with the new tax regime in place, it seems that things are only going to get better for the two main parties involved: buyers and developers. The new tax regime is much more transparent, which eliminates the swelling charges that had to be incurred at various levels like construction, approvals, registrations, etc. With so many levels of charges getting out of the way, the only major positive outcome that awaits is the fall in property rates. According to Edelweiss Securities, rates of properties could come down by 1–3%.

Here’s looking at the areas in real estate where GST will have a significant impact:

Happy developers, happy buyers

Before GST, developers had to pay up Central Excise Duty, VAT, and entry taxes on input costs, as well as separate taxes on labor, architect fee, and legal charges. All of these together hiked the final rate of the property, which was ultimately a burden on the buyers. With GST in place, these miscellaneous taxes are eliminated and other logistical expenses are also curbed. Effectively, the cost the buyers need to incur for the property is brought down significantly and the developers, too, are left with little worry. As a result, it can be hoped that even new luxury apartments in cities like Bangalore may not be as expensive as earlier.

Under-construction properties, pre- and post-July 1

All under-construction properties are taxed at 12% of their value, as per the new GST guidelines. Stamp duty and registration fees are not included in this. Moreover, ready-to-move-into properties are not included for indirect taxation; hence, no GST applies to them.

Buyers who had invested in semi-constructed properties before the advent of GST would have to pay 12% tax on the pending amount that they owe developers. Similarly, developers can avail of input tax credit on all the material that they would require to complete the construction work that remains after July 1. And, this benefit gets passed on to the buyers in the form of lower property rates.

It may be noted here that how much benefit buyers can get would largely depend on the amount of input tax credit the developers receive. In the case of projects that were mostly completed before July 1, the then applicable VAT and Service Tax were already borne by the developers, which means, they become entitled to lower input tax credit for the pending work. Lower input tax credit for developers means lower benefits passed on to buyers, that is, the reduction in property rates will not be too significant.

Secondly, in the case of under-construction projects for which the buyers had already paid up to 95% of the property rate, GST rates would apply only to the remaining 5% of the amount.

Black Money

In order to avail of input tax credit, developers will need to get all their construction inputs from registered vendors, which wasn’t really the case before GST was implemented. With the change in this scenario, the incidence of black money will be reduced drastically. So also, the requirement of complete transparency in transaction details will bring down the practice of cash-driven deals. The absence of black money and unaccounted cash transactions will bring down the final property costs that are ultimately borne by the buyers.

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