GST on Real Estate – 13 Ways It Impacts You
This post draws from the top real estate experts and online news sources on GST, and aims to be a quick primer on the impact of GST on real estate and its stakeholders – the sector, buyers, sellers, and developers, but is not meant to be a comprehensive authority on the topic.
The industry is still in wait and watch mode and it will be another 6-8 months post implementation to see any meaningful impact. In short, experts says it will have only a neutral effect on real estate.
Important Disclaimer: Although due care has been taken to publish only genuine and latest information, Chennai Dream Homes cannot be held responsible for the veracity of the information posted here, and any action taken as a result is at your own risk.
So, here are the important GST facts you need to know:
Part 1: GST on Real Estate – An Introduction:
The GST Bill was approved in the Lok Sabha on March 29, 2017 with four supplementary legislations –
- The Central GST Bill, 2017
- The Integrated GST Bill, 2017
- The GST (Compensation to States) Bill, 2017 and
- The Union Territory GST Bill, 2017
1. Intent of the GST
The GST will subsume central excise, service tax, VAT and other local levies to create a uniform market. GST is expected to boost GDP growth by about 2 per cent and check tax evasion.
2. Previous Real estate Transaction Tax Rates before GST:
Bengaluru Mumbai Pune Chennai Gurugram VAT 4.0% 1.0% 1.0% 2.0% 4.0% Service Tax 4.5% 4.5% 4.5% 4.5% 4.5% Stamp Duty 5.7% 5.0% 5.0% 7.0% 6.0% Registration Charges 1.0% 1.0% 1.0% 1.0% 0.5% Total Taxation 15.2% 11.5% 11.5% 14.5% 15.0%
Source: Industry, JM Financial
3. New Tax Rates – GST on Real Estate Transactions
The GST Council has recommended a four-tier tax structure – 5, 12, 18 and 28 percent.
Under revised order from the government, under-construction properties will be taxed at 18% which includes 9% SGST plus 9% CGST. The government has also allowed deduction of land value equivalent to one-third of the total amount charged by a developer, thus, making the effective tax rate as 12% . Athough, stamp duty and registration charges are currently kept outside the ambit of GST, soon these state levies are expected to be subsumed into GST.
Part 2: Impact of GST on Real Estate Sector
4. Impact by Construction Stage
Residential construction services, will invite GST at the rate of 12 per cent, which will apply to developers selling residential units before completion of construction to the home buyers. Nevertheless, stamp duty will continue to be applicable , irrespective of whether the property is under-construction or constructed, in the pre-GST and post-GST regime.
Another important factor that needs to be examined, is the stage of construction. If the project is at an advanced stage, where substantial cost has already been incurred before the application of the GST, very little input credit will be available to the developer and very less benefit will be passed on to the buyers. But if the project is at an early stage, more benefits can be passed on.
The much-debated and long-pending GST roll out post July 1st 2017 augurs well for the real estate industry which has always been regarded with suspicion. The GST rate, set at 12 per cent for real estate could possibly push affordable and mid-level real estate prices marginally lower. Further, the input credit provisions, if managed efficiently, will help improve cash-flow of the developers. The simplification of taxation is probably the most positive aspect and will augur well for both foreign investment as well as give the Non-Resident Indian (NRI) market more confidence to buy Indian real estate. Together with the Real Estate Law, GST will go a long way in making real estate more transparent and increase customer confidence,” says Tushad Dubash, Director, Duville Estates. GST will radically transform the real estate sector and will help real estate growth in the long term; but in short term the cost is likely to go up marginally,” he adds.Proptiger
5. What happens to Resale properties and Land?
GST does not apply to completed projects or resale properties. So, the 12 per cent is not applicable here but just the stamp duty since there is no service tax or VAT on resale properties. Therefore, on a resale property, you anyway have the benefit of saving up to 9% which includes the approximate value of service tax and VAT taken together in case of an under-construction property. However, this is a simplistic assumption. The price of a resale property and an under-construction are anyway not the same. Where it is similar, buyers do have the benefit of saving some fraction.Similarly, sale of land and completed buildings will be out of the purview of GST.
6. Ready to Move In properties will be preferred
Realtors reckon that ready-to-move in properties would be preferred by homebuyers now as that segment remains out of the GST ambit. However, such properties are likely to cost a bit more now as these properties won’t get any benefit of input tax credit.
While the intent is to streamline the tax administration and bring more businesses in the tax net, it is unlikely that GST will have any impact on property prices. He believes that the current rate of 12% on under-construction projects might marginally bring down prices in the affordable segment owing to the input tax credits, but it is unlikely that similar impact will be felt in mid-priced or premium developments.Surendra Hiranandani, CMD, House of Hiranandani.
Part 3: GST on Real Estate – Impact on Home Buyers & Developers
7. Will Tax Burden on Home Buyers increase post GST?
The Tax burden on homebuyers in under-construction projects is not expected to increase in Goods and Services Tax (GST) regime: The general perception was that with the 12 per cent GST rate, the tax has gone up from 5.5 per cent (service tax plus VAT). But a lot of efficiencies have been brought in through GST.
The taxation earlier was too complicated for buyers. For instance, buyers were earlier liable to pay taxes depending on the construction status of the property and the state where it is located. Buyers also had to pay VAT, service tax, stamp duty and registration charges on purchase of an under-construction property. However, if the purchase was for a completed property, the taxes applicable were only stamp duty and registration charge. Furthermore, since VAT, stamp duty and registration charges were state levies, each state specified its own figures. Service tax was a central levy and was charged on construction. So the calculation of taxes was very tedious in the earlier regime.
VAT (with rates differing from one state to another) and service tax together accounted for 7-9% of the ticket price for a residential property, which is 3-4% lower than the GST rate. Due to information asymmetry, however, consumers were largely unaware of how VAT and service tax are calculated — definitely, the entire tax calculation was too complex for laypeople to understand.
Any real estate product comprises of three expense components, namely land, material and labour or service costs. VAT is calculated on material cost, and service tax is calculated on labour and service cost. It is very difficult for buyers to ascertain what components were included for calculation of VAT and service tax.
The biggest takeaway is that GST is a simple tax that applies to the overall purchase price.
The implementation of GST makes the calculation much simpler, since the buyer has to pay only a single tax. Also, the builder must pass on the benefit of the price reduction he enjoys due to input tax credit to the buyer.
Customers who buy apartments in projects which are less than 60% completed will get more benefit as against those that are near completion due to the higher input credit which builders may get in early stages of construction.Santosh Agarwal, chief financial officer of Gurugram-based Alpha Corp Development Pvt. Ltd
For end-users if a project has received an occupation certificate they can go ahead and buy the property. They should prefer ready-to-move in properties. Since sentiment in the market is low as of now, they may even get better deals. Unlike demonetisation, GST has not had a negative impact nor is it likely to. But consumers should remember that unless the project enjoys a unique location, there is no trigger for capital values to move up under the present market conditions. So, they should buy if they are planning to move in themselvesAnckur Srivasttava of GenReal Advisers
8. Will GST make home loans expensive?
The main cost of taking a home loan, is the interest payment on the money. This cost will not change, as there is no service tax or GST on it. Similarly, any stamp duty charged in connection with the documentation of the home loan, will not change with the GST, as stamp duty is not subsumed under the GST.
However, there are various charges that are levied by lenders on home loans: First and foremost is the processing fee that is paid at the time of taking the home loan. At present, it is 15 per cent but it will go up by 3 per cent under the GST, to 18 per cent. This is generally a one-time cost and its overall impact on your home loan tenure, will be insignificant. The banks may also recover other charges like advocate fees, valuation charges, etc., in connection with the home loan, which will go up proportionately. Like the processing fee paid at the time of application, you may have to pay prepayment charges, in case you decide to prepay the home loan before the completion of its tenure or shift the home loan to another lender. This is generally payable, in case the home loan is taken under a fixed rate of interest. For floating rate home loans, banks cannot levy any prepayment charges. The lenders can also charge you for any EMI default, either due to return of the cheque or ECS return, on which the GST rates will go up. So, it is practically on all the charges that are recovered by the lenders that the GST rates will go up by 3 percent.Housing.com Blog
9. Which Home Buyer Costs will go up?
A vast majority of construction materials are placed in the 28% tax slab (slightly higher than the previous tax rates); hence, the cost of internal fittings such as ceramic articles, tiles and granites, among others, may go up marginally.
Buyers, therefore, can expect a higher price across mid-end/high-end and premium/luxury segments except for residential projects launched under the Pradhan Mantri Awas Yojna (PMAY), which has been exempt from GST.
Source: proptiger.com
The government has not subsumed the property tax in the new tax regime. This means that a property owner will continue to pay property tax on a yearly basis as per the state law concerned apart from the GST . “While electricity usage has been kept out of the purview of GST, water charges will attract concessional GST rate.” Repair work is also set to cost dearer – In case a housing society carries out maintenance or renovation work and buys commodities such as cement, paint or steel.Times of India
10. Impact on Luxury Housing
Luxury housing prices will rise while affordable and low-cost housing will not see any impact. Luxury housing has a bigger component of land price. Input credit will not be sufficient enough to bring down the price. Pankaj Kapoor, managing director of Liases Foras
11. Impact on Investors
GST is expected to be a sentiment booster for the industry and will seek to revive buyer and investor interest by bringing more transparency in taxation. As the perception of the sector is said to have improved, the prices are likely to drop around 1-3% if it all they do, according to a report by Edelweiss Securities.
12. GST’s Impact on Developers
In the previous tax regime, developers also grappled with the challenge of multiple taxation. On various construction materials purchased, the builder paid customs duty, central sales tax, excise duty, entry tax, etc., thus creating various instances of multiple taxation. The cumulative burden eventually got passed on to the home buyer.Anuj Puri, Anarock Property Consultants
- GST will eliminate all the other taxes, and the benefit of being able to claim input tax credit can also improve developers’ profit margins
- Major construction materials (Cement, Iron rods/pillars, Paint, Wall fittings, Ceramic tiles, Sand lime bricks, etc.) have not seen a major change in tax rate. However, the marginal change in the percentage of these variables will make a huge difference as transportation and logistics costs reduce in the single taxation system.
13. Impact on Selling a property
GST does not apply for resale properties that have received occupation certificates. The buyer will, however, have to pay stamp duty and registration charges that were in existence even before June 30. Both these charges vary from state to state.
However, if a seller wants to dispose of a property that is still under construction, that will attract GST for the buyer.
The existing owner will not have to pay GST on the amount paid to the developer before June 30 but all payments made to the developer after July 1 will attract GST. All subsequent payments to be made to the builder by the new owner after July 1 will attract GST.MS Mani, Partner, Deloitte Haskins Sells LLP
Your decision to sell property should entirely depend on your financial requirement or other reasons for which you wish to dispose the property.
Conclusion
The impact of GST on real estate sector is expected to be neutral under GST. Though still, there is going to be a substantial benefit from GST as it will bring a lot of required transparency and accountability. Developers or Contractors would reap the benefit of many taxes which will be subsumed by GST.
Sources: Knight Frank India, Anarock, CBRE, Economic Times, Indian Express, Times of India, MoneyControl, Top Developers, Proptiger, Housing.com, Cleartax.
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