The Goods and Services Tax (GST) is being hailed as a transformative tax reform since Independence, with the potential to simplify and streamline India’s complex tax system.
The Indian real estate sector has witnessed significant growth in recent years, not just in Tier 1 cities but also in Tier 2 and Tier 3 cities and towns. The sector is poised for increased regulation, with initiatives like RERA, and GST is another key development expected to impact this industry significantly.
Real estate accounts for approximately 5% of India’s GDP and is considered the second-largest employer in the country.
However, the sector faces challenges stemming from macroeconomic conditions and government financial policy decisions. One such challenge is managing various indirect taxes such as VAT, Service Tax, excise duty, stamp duty, and registration fees.
These complexities have led to inconsistent practices across developers, geographies, and even within states. The introduction of GST aims to address these issues by providing a standardized approach across the nation. As a result, taxes paid by homebuyers across states should be more uniform.
In the past, homebuyers were required to pay service tax and VAT on the purchase of residential units before possession. GST aims to replace these multiple taxes with a single, streamlined tax while ensuring smooth credit flow across the supply chain.
Under the new guidelines, under-construction properties will be taxed at 18%, which includes 9% SGST and 9% CGST. The government has also allowed a deduction for land value, equivalent to 33% of the total amount charged by a developer, effectively reducing the tax rate to 12%.
Stamp Duty and Registration fees are excluded from GST, as they are state-level taxes, while property tax remains a municipal levy.
Overall, GST is expected to benefit the real estate sector, particularly by facilitating the smooth flow of credit, which could lead to higher margins for developers. Whether these benefits will be passed on to end users/clients remains to be seen, as pricing in this sector is primarily determined by market forces rather than cost structures. Importantly, as the GST framework is expected to enhance transparency within the market, it is crucial for real estate transactions to be incorporated into the proposed GST structure.
The impact of GST on the real estate industry will significantly reduce ambiguity. It has been clarified that under-construction flats will be taxed at an effective rate of 12% on the sale value. For properties with a Completion Certificate (CC) or Occupation Certificate (OC), no GST will be applicable on their sale. GST has streamlined the taxation process, replacing VAT and service tax with a single GST, consolidating all indirect taxes.
Here are the key points you should know about GST for your property:
1. GST aims to bring efficiency to the overall tax system.
2. The GST rate is 12%, but buyers must understand the details of Input Tax Credit (ITC) under the GST regime. Buyers should check the construction stage of the project as of June 30, 2017, to calculate their ITC benefit.
3. As with the previous service tax regime, renting residential property is exempt from GST. However, if the annual rent received from rented commercial property exceeds Rs 20 lakh, GST will apply.
4. There will be no change in stamp duty and registration charges, whether the property is new, under construction, or a resale property, as these levies remain under state jurisdiction.