The Goods and Services Tax (GST) has consumed many a news cycle, over the last few years. Touted to be the biggest indirect tax reform in the country’s history, the road to its becoming a reality has been littered with numerous obstructions and delays. However, with the Union Parliament having finally passed four bills related to this legislation and the rates for goods and services decided by the GST Council, it seems that the tax will meet its rollout target of 1st July 2017.
Construction and real estate is the second biggest sector in the Indian economy and cannot be immune to this all-encompassing legislation. In order to assist home buyers and others with an interest in this sector regarding the impact of this tax, we have come up with this FAQ set:
Q1. How has real estate been taxed up till now (prior to GST)?
A. Taxation of this sector has been a rather complex process, with taxes imposed by central, state and local authorities on a variety of items, from land, transportation, construction materials, building cost, Value Added Tax (VAT), service tax, octroi and property registration, being the most prominent ones. In addition, the taxation process has been non-transparent, with no clarity across the entire supply chain from raw material manufacturers/suppliers to the end customer.
Q2. What problems does this tax structure cause for developers and customers?
A. Due to the opacity of taxes paid across the supply chain, taxes paid by say, a supplier, is added by him to the cost he charges from the developer, who also ends up paying tax again on the same amount, pushing up his cost of construction. Tax evasion was also a common feature. The customer is the ultimate sufferer as eventually, all this ‘tax cascading’ reflects in a higher price for his dream home.
Also, delays in transportation of raw materials is a common occurrence owing to long queues at state borders or outside city limits for entry tax or octroi, which affects project delivery schedules and hence, the developer’s credibility.
Q3. How does the GST propose to treat taxation on real estate?
A. The GST aims to improve the ease of doing business in the sector by its two main principles: reduced complexity and transparency in taxation. This tax will subsume various central, state and local levies such as VAT, service tax, octroi, inter-state transportation and taxes on raw materials and construction.
Across the supply chain, each party (supplier, developer, transporter etc.) needs to pay a single rate, which is known to all and can claim tax credit for the portion already paid by another party. Hence, one only pays taxes on the value added by him/herself and this removes the problem of tax cascading, which unnecessarily pushed up home prices.
Q4. What are the remaining steps for the GST to become operational across the country?
A. The Union Parliament has cleared four legislations related to this tax: the Central GST (CGST) for central government taxes on supply of goods and services within a state, Union Territory GST (UTGST) for taxation within a Union Territory (other than Delhi and Puducherry), Integrated GST (IGST) for taxation on inter-state movement of goods and services, and a Compensation Bill to compensate state governments for any revenue loss for 5 years after the tax comes into effect.
The next step involves all states and the Union Territories of Delhi and Puducherry needing to pass a state GST (SGST) law in their respective legislatures, which will be in line with the central law, by the 1st of July 2017, for the GST to become fully operational.
Q5. What other benefits does the GST hold for real estate?
A. GST has a self-policing mechanism: by providing all parties the opportunity to claim input tax credit, it aims to foster a culture of greater transparency and accurate disclosure of actual revenues earned and expenses incurred. By doing so, it aims to bring down tax evasion, which would be a great boon to the realty sector, which had been perceived negatively in customers’ eyes for the same reason.
Construction delays due to equipment and raw material being held up at various boarders will become history, with the IGST coming in. Developers will be able to have greater control over project delivery, which also works to customers’ advantage. The law is likely to eliminate many unscrupulous developers, who thrived on the opacity on the earlier system, from the market. Customers should take care to purchase homes only from reputed developers with a good delivery record.
Q6. As an end customer, will the GST be the only tax I will have to pay while buying a home?
A. No. Levies such as the Stamp Duty (imposed on the cost of land/property) and registration charges are outside the ambit of this tax and will be charged separately.
Q7. I am to take possession of my home in June 2017 (just before the GST comes in). Will I be liable to pay GST?
A. No, you shall be taxed as per the existing system. However, the GST will be applicable to all under-construction projects at the date of its implementation and new projects, launched after that date. Based on presentations made to them by real estate body CREDAI, the GST Council has set a rate of 12% for under-construction and new properties.
Q8. I am planning to purchase completed property in a secondary (resale) transaction? Do I need to pay GST?
A. No, this tax will not apply to buyers, who are purchasing a completed and ready to move in property in a resale transaction.
Q9. How will the GST affect the final cost of my dream home?
A. The government has spoken about affordable housing being one of its focus areas and setting the taxation rate for real estate at 12% instead of the much talked about 18% is indeed a step that helps in this regard. While for developers operating in states with a composite VAT scheme, the tax burden may go up a bit, it may come down by a limited amount for those in states, not providing this scheme. That said, all developers can claim input tax credit on their materials etc. which offsets some of the tax increase, so the impact on home prices should be minimal, a big relief for home buyers and developers alike.
The GST will also be applicable to EMIs payable on home loans, hence with a lower tax burden, as sales would go up, unsold inventory would reduce and home buyers would get a great deal as well.
However, an area of concern remains the exclusion of stamp duty and registration charges from this tax, which add a sizeable component to the final price paid by a home buyer. In recent years, the ready reckoner rate on land, on which stamp duty is levied, has shown a sharp upward increase in most real estate markets.
Update as of 16th June 2017
In recent days, many instances have been noticed of developers asking home buyers of under-construction projects to pay up the entire balance amount before 1st July 2017, else be ready to pay a higher amount from that day onward, owing to the GST. The Union Finance Ministry has issued a clarification in this regard on 15th June 2017, which is summarized below.
In the sale agreement between a developer and home buyer, the only tax component the latter sees is the service tax (4.5%) and VAT under composition scheme (1-2%), making it appear the total tax payable is 5.5-6.5%. However, included in the price of an apartment are VAT on construction materials (12.5-14.5%), excise duty on construction material (12.5% onwards) and Entry taxes imposed by state Governments. All these are not visible to the home buyer, but form part of the tax burden on him/her, which the GST will subsume.
In addition, with input tax credits available for developers to claim, the same is expected to be passed on to consumers. Hence, not only is the total tax payable lower under the GST (12%) on under-construction properties, with the input tax credits, the tax burden should actually come down further. If the developers are charging a higher tax post-GST, this will be considered as profiteering, which is an offence under the GST Act.