If you are a property owner or planning to be one soon, this question might be worrying you. Among several taxes that the home buyers are bound to pay on property, the purchase is the GST or Goods and Services Tax on property. Since it came into force in July 2017, it has been a game-changer, especially for the real estate sector. Be it developers, builders, contractors, or buyers, we all have to experience the impact of GST on real estate.
This article will examine the impact of GST on real estate sector and how it has affected home buyers.
What is GST?
Now before we dig deep to learn about the effect of GST, first, let’s understand what does the term GST has been creating a buzz means. GST is a single tax that attempts to replace all central and state taxes and duties such as exercise duty, countervailing duty, service tax, value-added tax, octroi, entry tax, and luxury tax. Goods and Services Tax charged by the final dealer (seller or service provider) is the ultimate tax borne by the customer, with reduce all taxes paid at all earlier stages in the supply chain.
Taxes Before The Implementation of GST
Like every section of the economy, there is some positive and negative effect of GST on Real Estate sector. The real estate industry contributes around 6-8% to India’s Gross Domestic Product (GDP) and stands second after the IT industry in terms of employment generation.
Before we jump in to understand the impact of GST on real estate, we need to understand what the tax system was before GST. Before the GST came into existence, the tax regime required buyers to pay VAT, Service Tax, Registration charges, and Stamp duty on the purchase of properties under construction.
As states changed, so did the prices and state duties. On the other hand, developers had to give the Excise duty, VAT, Customs duty, Entry taxes, etc., on raw materials/inputs and Service tax on various input services like approval charges, architect professional fees, labor charges, legal charges, etc.
All of this resulted in the increase of the property’s price, and the extra cost incurred on these taxes was then coming out from the buyers’ pocket. Previously as the tax on building raw materials increased, so did the manufacturing cost of a property.
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Key Impact of GST on Real Estate Industry
- After GST came into force, a single tax rate was collected under the present tax regime.12% tax is applied on properties under construction, while GST is not applicable on completed or ready-to-sale properties, as was the case in the previous law. Buyers can benefit from the reduction of prices.
- Another interesting observation is after the application of GST, builders/contractors don’t have to pay a varied account of taxes. Thus it will surely provide margin to them. The cost of logistics decreases, and there are other added benefits. With the reduction in the multiple taxes, the property costs will considerably go down.
- With GST, the real estate sector has witnessed an increase in transparency and accountability.
- Despite all the positive effects of GST on real estate sector, there are a few effects that deter investments made in the real estate sector. Like the effect of GST on property concerning developers, builders, and contractors. They will have to do the cumbersome calculations to get the ITC. This is why they will have to hand it down to the buyer only in the final stages. A large portion of the building process’s expenses remain unaccounted for, and the differed buying decision will affect their profits.
- The Reverse Charge Mechanism (RCM) is another aspect that has created a negative effect. According to this, if a person receives goods and remains unregistered under GST, a GST registered person will pay all the GST on the goods. Also, the developers can’t pay the tax generated under RCM with the input credit available against GST, and they have to pay with cash/ bank payment. These additions will increase the cost and negatively affect the developers, primarily the small ones. In addition to this, there are several conditions to be fulfilled before claiming the ITC.
- The new GST rates were introduced for residential properties in April 2019. With ITC benefits removal, exemption of Stamp Duty, and Registration charges, the property’s overall price didn’t change much in terms of pricing. However, the completed properties with a certificate were exempted from tax while under-construction units were placed in the 5% tax segment.
Will GST change the buying decision of the consumer? It is still a game of ‘wait and watch’ to see what substantial effect of GST on property is recorded with passing years. Some believe that it has left a striking effect. In contrast, others think that the positive and negative effects have balanced each other out well and that there’s no significant change that has occurred.
But the real-time impact of GST on real estate can only be obtained over time. GST tax system was brought in to reduce the multiple taxes and duties citizens had to pay. It was to build a single robust tax system across the country. Like all the laws and regulations, GST is still a topic of discussion, and the finance and investment pundits are still evaluating the impact of GST on real estate sector.