1st of July 2017; this date will go down in the history books of our country when the biggest tax reform got implemented with full force across the nation in all the industries and sectors. Real estate sector being one of the largest contributors towards the Indian GDP and employment generation, it’s reactions, objections and suggestions are always considered whenever any big policy implementation takes place in the country.
The much awaited Goods and Services Tax (GST) has been finally implemented inspite of all the bottlenecks and confusions looming, where even real estate sector has got its rate finalised. Real estate being a case of land, which is an asset, is neither regarded as a good nor service. As a result, a different solution has been provided to counterbalance the negative effects of tax on the valuation of property. After the final notification, the government has declared the GST rate for under-construction properties in real estate at 18 percent which will be applicable on two-thirds of the value of the property. The one-third or 33.33 percent discount on property value has been given against the land price. Since land is an asset and with court pronouncements, this has resulted in it being kept out of the GST regime.
Previously, a different formula for the calculation of service tax was carried where an abatement of 70 percent was allowed on the total value of the property to adjust against value of land and commodities utilised for the construction of a unit. Therefore, buyers earlier had to pay only 15 percent on the 30 percent of the property value. Thus, the net service tax for the real estate was 4.5 percent only. Whereas now, the GST rate for under-construction real estate has been decided at 18 percent; but the net tax incidence will remain at 12 percent (two-thirds of 18) of the selling price for a unit or property.
Apart from service tax, a property may go through several other central and state levies in the form of VAT, excise, CST, registration and stamp duty charges. These jointly contribute and brings the total indirect taxation to about 5-10 percent, varying with states. Stamp duty and registration charges are exclusive of this and further adds to the net cost for the buyer. But with GST, a 12 percent levy along with registration and stamp duty charges, property prices for under-construction units are expected to go up if the benefit from input tax credit is not passed on by the developers.
Now with the GST in place, it will bring about clarity, transparency and uniformity towards taxation in the country’s real estate sector. Also with the anti-profiteering clause added in the GST law, it will be mandatory to pass on the benefit of tax reduction arising out of the input tax credit to the final customer. The multiplication of taxes will now get curbed as credits of input taxes paid during each stage of production can be availed in the succeeding stages of value addition.
In a nut shell, GST for the realty sector is projected to be beneficial in the long run, if implemented in a proper manner. The only dampener can be if the benefit of the input tax credit is not passed on to the buyers. In the long term and for the overall economy in general, GST is expected to contribute 1-2 percent towards the Indian Gross Domestic Product (GDP).