Impact of GST on Under-Construction Properties- Real Estate Redefined.
Goods and Services Tax or GST is a combination of all kinds of indirect taxes under one comprehensive tax. There are four different tax slabs in GST – 5%, 12%, 18% and 28%. Majority of daily consumable items have been kept under 5% tax slab while the luxury items will attract 28% GST. Everything in between will be taxed at either 12% or 18%. Now, before we get into the effect of GST, let us understand how real estate is taxed in the current tax regime.
Real estate sector is the most pivotal sector of Indian economy. Its importance can be understood with its average 5-6% GDP contribution. The Goods and Services Tax (GST ) Council has defined the work contracts under 12 percent slab, whereas the ready to move in properties still remain out of the new tax system. GST would bring transparency in the real estate sector and would minimize unscrupulous transactions. GST for the sale of buildings and land has not yet been fixed but is to be done within a period of 1 year. The rates declared for cement, bricks and iron under GST would benefit the real estate taxation.
Cement will be taxed at the rate of 28% under GST. It is higher than the current average rate of tax by 23-24%, but a lot of additional taxes charged over the average rate would be subsumed under GST. Iron rods and pillars used in the construction of buildings are charged at the rate of 18% which is similar to the current average rate of 19.5%. Bricks used in the construction of buildings and houses are taxed under GST at the rate of 28% except for the rate of ceramic building bricks which is kept under 5%. Currently, all kinds of bricks except the ceramic ones are charged an average tax rate of 25-26% including all the state as well as central level taxes. Also, the logistics cost of construction materials will experience a reduction through subsuming of taxes. Despite higher rates, the sector is likely to benefit from the availability of input tax credit. As under the current tax regime, the benefit of input tax paid is not fully available, the benefits arising out of input tax credit on the raw-materials available under the GST regime would result in an overall neutral tax incidence for construction services.
Under GST, majority of construction contracts fall under work contracts. The service tax applicable to construction companies is generally 6 percent assuming 40 percent service portion of the contract. Although many activities like construction of roads, dams, and irrigation are exempted from service tax and VAT payable and are applicable on the supply of goods portion of the contract.
Also Read: What is GST?
The current tax structure of residential property
Home buyers have to pay both service tax (ST) and value added tax (VAT) on the possession of the under-construction property. the taxes vary from builder to builder and state to state. The service tax including cess of 15 %, builder on this get subsidy on land and other services. which in returns would make the service tax only 4.5 % on the sale value. Vat is applicable on the sale of property, this as well varies between 3% and 5%, depending on the state. Average VAT is 4.5% of the sale value. The total tax goes around 9% on the sale of the property in the current tax regime. There is no service tax or VAT on ready move in property.
Under GST, the sale of under- construction real estate properties would be defined under the supply of services and would be liable to pay GST. The GST Council has fixed the rate of 12 percent for work contracts. In the current GST, the ready to move in properties and lands are exempted from GST just like the contemporary tax regime.
Although now a home buyer would be confused thinking that the current tax regime says only 9 % tax on under-construction property and GST has fixed rate of 12% then how will GST benefit a home buyer?. As per clause 171 of the GST bill, It is mandatory to pass on the input credit benefits due to the reduction in the rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices.
It is expected that the impact of GST on real estate prices will be neutral and positive in the long run under GST. GST will bring substantial benefits in the real estate sector, as it is supposed to raise transparency and accountability in the entire process of buying and selling properties.