The switch over to the GST regime is undoubtedly one of the biggest tax reforms in post-independence India. From July 1, 2017, GST effectively cuts through a confounding Gordian knot of taxation complexity in the country. In other words, it replaces the multiple taxes levied by the central and state governments and will become subsumed of all the indirect taxes, including central excise duty, commercial tax, octroi tax/charges, Value-Added Tax (VAT) and service tax.
However, the biggest game changer in GST is the introduction of Input Tax Credit, whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. This makes GST fundamentally a tax only on value addition at each stage.
This means that the end consumer will thus only bear the GST charged by the last dealer in the supply chain, with set-off benefits at all the earlier stages. To ensure that manufacturers, developers and service providers pass on the benefit to the final customer, the government has included an anti-profiteering clause in the GST bill under section 171 of GST law.
Impact on Residential Real Estate:
Indian real estate sector has been going through significant transformation in the recent times. The recently implemented Real Estate and Regulation Act (RERA) has already started addressing the issue of non-transparency and affixes a level of accountability on real estate builders and brokers.
For the residential real estate sector, the implementation of GST will definitely be a positive sentiment booster among property buyers. GST may not be instrumental in bringing down the prices of residential real estate over the short term. However, it will benefit all the stakeholders of the residential real estate sector, on the back of a simplified tax structure and accountability being fixed at every stage.
Benefit to Property Buyers:
A simple and transparent tax applied on the purchase price is the biggest take-away for property buyers. Under the GST regime, all under-construction properties will be charged at 12 per cent (excluding stamp duty and registration charges). It will not apply to completed and ready-to-move-in projects, as there are no indirect taxes applicable in the sale of such properties.
VAT (with rates differing from one state to another) and Service Tax together accounted for 7-9 per cent of the ticket price for a residential property, which is 3-4 per cent lower than the GST rate. However, due to information asymmetry, the entire tax calculation was too complex for lay people 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 implementation of GST makes the calculation much simpler, since the buyer has to pay only a single Goods and Services Tax. Also, the builder must pass on the benefit of the price reduction he enjoys due to input tax credit to the buyer.
Impact on Affordable Housing:
The affordable housing sector, which is a major thrust area of the incumbent government, will not be impacted by GST. This has been clarified by the announcement from the finance ministry, which indicates that there will be no tax under GST for housing projects which comes under the affordable housing scheme.
Benefit to Developers:
In the previous tax regime, real estate developers also grappled with the challenge of multiple taxation. On various construction materials they purchased, builder paid customs duty, central and sales tax, excise duty, entry tax, etc., thus creating various instances of multiple taxation. The cumulative burden eventually got passed on to the buyer. GST will eliminate all the other taxes, and the benefit of being able to claim input tax credit can also improve developers’ profit margins.
Tax rate changes for major construction materials:
-Cement will be taxed at the rate of 28 per cent under GST, which is higher than the current average rate of tax around 20-24 per cent
-Iron rods and pillars will be charged at the rate of 18 per cent, which is similar to the average rate of 20 per cent under the old taxation regime
-Paint, wall fittings, plaster, wallpaper and ceramic tiles will be taxed at 28 per cent, compared with the previous average rate of 20-25 per cent
-Sand, lime, bricks and fly ash bricks will be taxed at 5 per cent, versus previous rate of 6 per cent.
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.
While there might be marginal impact on the real estate sector in the near term, we are definitely looking at a significant improvement in buyer sentiment and perception of this sector. Developers, too, will find the GST regime much simpler to work with, with the benefit of input tax credit being an added advantage.
The writer is the chairman of Anarock Property Consultants.
