They say ‘Change is the only constant’ but in order to succeed, change is not only constant but it is also inevitable. After many reforming initiations like “Housing for all” and RERA, the next thing that Real Estate along with all other sector is looking forward to is the Goods and Services Tax. GST is set to get implemented on 1st July 2017.
There are various goods and services which will have different rates prescribed by GST, which may impact their cost. A homebuyer henceforth will have to pay 12% GST to purchase a under construction house. If we look at the current scenario, real estate sector was heavily taxed, therefore 12% single tax structure is definitely a welcome move. We believe that existing multiple indirect taxes on the sector is higher and tax impact under GST would be neutral.
While the impact of GST on various sectors and goods is now known, industry experts are still divided over how GST will impact real estate going ahead as clarity on the tax slabs for services is still awaited.
Together with RERA, GST will go a long way in ensuring transparency in the realty sector and growing buyer confidence. The existing channels include issues of multiple taxation, amounting to indirect taxes and no uniformity. GST coupled with Real Estate Regulatory Act that has come into effect on May 1, 2017, would ensure efficiency in the realty sector. GST will free homebuyers and investors from the hassle of paying several state taxes at different levels, therefore removing the double taxation impact. Therefore 12% tax rate under GST regime looks favorable to the industry.
If we talk about nitty-gritty’s of the GST for real estate sector, in some cases, even input credit will be more than the GST levied on the finished product, but a developer can claim a maximum credit to the extent of the GST he would be paying on the finished product. As per the provisions of GST, it can be expected that GST may lead to input cost deflation for construction industry as credit of taxes paid on various inputs used in the construction activities will be available which is not available in current tax regime.
GST is also likely to boost foreign investment and benefit the NRI community for investment in real estate because of a seamless all-inclusive channel available. The simplification of taxation is probably the most positive aspect of GST and it will promise well for foreign investments. It will also raise the confidence of the NRI market to invest in Indian real estate.
From the consumer point of view, the major advantage would be in terms of decrease in the overall tax burden on goods. Currently it is estimated about 25%-30%. GST will help in free transport of goods without stopping at the state borders for long hours for payments of state tax or entry tax from one state to another state. This will reduce in paperwork to a great extent as well.
Residential and Commercial Segment: Impact of GST may vary according to the type of project and construction methods as only under construction flats are taxable under GST and input credits on sales of under construction flats are available to set off. At this stage, it is difficult to comment exactly on which type of projects will have more impact and which type of project will have more benefits. Therefore to analyse the type of project beneficial under new tax regime, it is advisable for developers and promoters to conduct GST impact analysis programme before implementing GST Systems.
As per the provisions of GST ITC Rules, input taxes paid on various elements used for the business (in our case construction activities) will available to offset against the tax liability i.e. GST collected from the buyers against the sale of under construction flats subject to certain restriction. It can be said that developer or promoter needs to pay only differential tax liability to the Government Body. Developer or Promoter has to collect taxes from customers from time to time and he is eligible to take input tax credit on goods as well as services used for construction activities. GST will help cut cash component in construction as products have to be sourced from registered vendors to get input tax credits.
Though under GST tax rate on under construction flats will increase to 12% from tax under current regime i.e. 5.5% (Service tax and vat rate under Maharashtra State) but input tax credit made available to promoters/ developers will reduce the impact of tax liability on cost of the projects. Also GST will subsume various taxes like vat, service tax, excise duty, entry tax, LBT (Octroi Duty in Mumbai) will also help to reduce administrative cost of developers. Under GST regime also Stamp Duty will be applicable on sale of flats and units.
Since the tax incidence on various monuments stones, aluminium, glass, ceramic, lamps and fittings are in the bracket of 18-28%, it can be expected that cost of luxury projects and commercial projects may rise if input set off not utilised properly. As the higher rate of tax will lead to increase in cost of construction activities.
Most of the construction material falling is under the 18% and 28% slab.
Affordable segment: Currently under VAT system in Maharashtra, tax exemption is not available to affordable housing scheme. As per the announcement from Finance Ministry in media it has been expected that there will be no tax under GST for housing projects which comes under Affordable Housing scheme. Also for avoiding extra burden of tax liability on inputs and input services used for projects covered under Affordable Housing scheme should be allowed to be exempt. This will ensure cost inflation impact is not passed by promoters/developers to customers who purchase residential units under the Affordable Housing scheme.