How Fair GST Scored in Real Estate Sector

Vouching to be one of the revolutionary changes post-independence in the indirect taxation system, GST made its voyage to the Indian financial market with the idea to avoid duplication of taxes.

To make India an economy of one nation one tax, the central government also aimed at increasing the tax base to collect indirect taxes. For the real estate sector, the growth under the GST regime is touted to fare 12% annually till 2020.

Also, with the new norms and acts introduced in the Union Budget 2019-20, the real estate market is predicted to witness some structural reforms. The central government has also introduced the affordable housing scheme to achieve its target of delivering houses to all by 2022 for first-time home buyers.

In our economy, concurrent Dual GST is applied on goods and services and it has impacted almost every sector directly or indirectly and real estate is no exception. The latter is already going through a transitional phase with new acts and ruling bodies such as RERA (Real Estate Regulatory Authority 2016), InvITs (Infrastructure
Investment Trusts) and REITs (Real Estate Investment Trusts).

Current Status of Real Sector

In terms of generating employment, the real estate sector is the second largest after agriculture. The experts have anticipated its growth rate to be 30% in the next 10 years with an estimation to touch a bar of US $180 billion by 2020.

To understand the real estate sector, it has been bifurcated into:

  • Housing
  • Retail
  • Hospitality
  • Commercial

Pre-GST Taxes and Charges

Let’s have a look at the previous charges that were applicable in the real estate market for buying and selling a property:

Tax & Charges 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: JM Financial

From the above table, one can easily calculate the taxes to be falling between 11.5% to 15.2%.

Post GST Effects

After the introduction of GST, the residential properties which earlier were varying from 11% to up to 15.5% now attract the GST of 12% with a full input tax credit to sellers. However, the GST has been further reduced to 5% on the projects initiated after April 2019.

Under the composite VAT, the states used to charge lower VAT rates barring any input or partial tax benefit. Herein, the developers, generally, used to pass on the transactional cost to buyers.

However, after GST is being imposed, the transactional cost has increased to 12% where input credit is available for services as well as materials. Point to note here is that in case the developer failed to pass any input credit, it will invite an increase in the transaction cost by 6%.

The property prices could be restricted to 1-2% if the developers pass on the buyers the input credit.

GST Rates on Input Materials for Real Estate

Description of Goods Rate
Steel 18%
Cement 28%
Marble and granite 28%
Sand lime bricks and fly ash bricks 12%
Blocks of marble and granite 12%
Natural sand, pebbles, gravel 5%
Lifts and elevators 28%

Source: BMR
Due to the availability of input tax credit in the purchase of construction materials, the overall tax rate is neutralised.

However, the projects that are at the initial stage will benefit more than the projects at an advanced stage, as maximum input credit can be availed in the former one as compared to the latter.

The dream of affordable housing comes out to be true under the GST regime as the rates are expected to be cheaper if the GST exemption is extended to such projects.

Talking about the luxury segment, they are benefitted very little as the input tax credit limit can be availed up to 12% only. Taxes on other expenditures that occurred in luxury projects are still applicable, hence the overall effect is negligible.

Construction Cost – Reverse Charge Mechanism Impact

Herein, the registered person is liable to pay GST on behalf of an unregistered person under GST from whom the former has taken the goods and services. Such tax has to be paid via cash or bank transaction and cannot be adjusted against the input tax credit.

It has adversely affected the developers as they now have to pay the tax for the services they have rendered from those who fall in non-taxable slabs. The developers are also liable to pay GST for the services they have acquired from local or government authorities, including municipalities et al.

The small investors/developers are more affected by the GST regime as earlier they used to avail services from unregistered suppliers without carrying any liability to pay tax for them.

In the long run, GST is expected to enhance the profit margins and boost the growth in the real estate sector with an easier taxation system than before.