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Here’s how GST will impact real estate

Friday, February 10, 2017

The recently released Economic Survey has suggested including land and real estate under GST. This could see prices come down in the long run, but it all would depend on the applicable tax rates and the manner in which it is implemented, feels Krishnan Venkat

The last few months have seen the government and implementing authorities taking rapid steps towards making the Goods and Service Tax (GST) regime in India a reality. GST would replace a host of current indirect taxes such as excise duty, service tax, VAT, octroi, entry tax, etc with availability of full credits of taxes paid on procurements, thereby fueling expectations of reduced prices.

The original deadline of April 2017 will not be met, but with most of the contentious issues between the Centre and states sorted out, GST is all set to be introduced in 2017, most probably by July. Significant progress has been made on various aspects of GST implementation in terms of the law, IT systems, training of tax authorities and tax rate slabs.

Tax rates explained
The most direct and crucial impact of GST on the common man comes from the applicable tax rate on goods and services. The Government has proposed a four tier tax rate for goods – 5%, 12%, 18% and 28% – and is mulling a two tier tax rate for services – 18% standard rate and 12% for certain services.

The real estate sector presently faces the issue of dual taxation, with VAT and service tax applicable on the purchase of under construction flats. In Maharashtra, while there are different options to pay VAT on under construction flats with prescribed restrictions; mostly, VAT at the rate of 1% of the contract value is the preferred option. Service tax at the effective rate of 4.5% (with a 70% abatement on the contract value) is levied. Besides, VAT and service tax, stamp duty is also levied on purchase of flats. No VAT or service tax is applicable on ready to sell flats.

While it might seem that a purchaser is paying an effective tax of 5.5% on the contract value plus a stamp duty, in essence, the indirect tax cost is much higher. The builder / developer is not eligible to off-set the credits of the excise duty and VAT paid on procurements such as cement, steel, iron, etc thereby increasing the procurement cost to the builder / developer. The effective tax cost on the procurements could be around 5-6% of the contract value. This tax cost is passed on to the purchasers through increased prices on the purchase of flats, thereby taking the component of indirect taxes in the cost for the purchaser in the range of 11-12%.

Under GST, there would be no issue of dual taxation, with only GST being applicable on the transactions. Further, with full credits of taxes paid on procurements expected to be available, the procurement cost for the builder / developer should reduce which can be expected to be passed on to the purchaser by way of reduced cost.

However, given the proposed tax rate slabs, a GST rate of 18% could see a significant rise in the price the purchaser pays for the property. Further, stamp duty would continue to be applicable, as the same would not be subsumed under GST. At the same time, the decision to pass on the tax benefits available on the procurements is that of the builder / developer, for which the purchaser does not have any visibility.

Manner of implementation
The above-mentioned factors may not necessarily bring down the prices in the real estate sector under GST. If land is kept out of GST, an abatement, as at present can be expected to be provided to the sector. If that be the case, a 70% abatement would bring the effective GST rate close to 5%, which should be beneficial for the sector. With reduction in cost on the procurement side for the builder / developer, it should be a win-win situation for both the builder / developer and the purchaser.

This sector, which had to bear the effect of demonetisation recently, would look forward to the government and the GST implementing authorities to provide it with a much needed boost through a favourable tax regime under GST. A higher effective tax rate under GST would be a further deterrent to the sector, which would have a direct impact on the purchasers. On the other hand, a lower GST rate and favourable credit regime would see an increase in investments in this sector.

(The author is CA and a MBA from the Indian School of Business. A specialist in the field of indirect taxation, he is the author of the book “Introduction to Goods and Services Tax – The Biggest Tax Reform in India”. The views expressed above are in a personal capacity and are based on few documents placed by the government in the public domain.)

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