Impact of GST on Real Estate
The night of 1st July 2017 proved to be a revolutionary night for the Indian Tax system, with the roll out of the long-awaited Model GST laws. It is estimated to positively enhance India’s attraction as an investment destination.
The Real estate sector is one amongst the many sectors that have experienced massive changes this year. The 2016 demonetization coupled with the recent introduction of the Real Estate Regulatory Act (RERA) and GST, have had a massive affect on the already struggling real estate market.
While RERA aims at bringing about a higher level or transparency and regulating the grossly unregulated industry, GST strives to ease business transactions and rationalize the tax structure by bringing about uniformity in prices. The industry has been subject to various speculations of its future in the past few months, with real estate experts estimating a spike in prices post RERA due to the increase in the cost of compliance as against the opinion that GST will bring down the prices of property in the long run.[i]
Section 2(119) of the CGST Act provides that if there exists any form of transfer of property in goods in the execution of any of the contracts named therein, such form of supply would fall under works contract. Entry 6 (a) of the same schedule states that composite supply shall be treated as a supply of services.[ii]
Section 22 mandates that every supplier of goods or services must be registered under the Act if his aggregate turnover in a financial year exceeds Twenty Lakh Rupees and if in case such a person supplies goods or services from any of the special category states[iii], he shall be liable to be registered if his aggregate turnover is more than 10 lakh rupees.[iv] Companies engaged in construction, present in multiple states must obtain registration in all such states where their project office is present. In cases where, the immovable property is situated in the same state as that of the place of registration, CGST and SGST shall be levied and in case, the immovable property is situated outside the state in which the registration is obtained, IGST will be levied.
Input Tax Credit
Though input tax credit is restricted for works contract under section 17(5)(c), it is estimated to play a major role in determining the final cost implications on the real estate market. Currently input tax credit has been allowed on raw materials and services used for construction activity which should bring down the overall cost of property
Another positive aspect input tax credit is that it will bring down cash transactions and boost tax compliances, as input tax credit may be availed only in cases where raw materials are sourced from GST- registered vendors.
GST on Residential Property
Under- construction property
On 28th June 2016, the Finance Minister issued a notification allowing one third of an apartment cost to be deducted towards the transfer of land or the undivided share of land and GST to be paid at the rate of 18% on the balance amount, thus, bringing the GST rate effectively to 12%.
The issue arises because buyers usually pay developers a lump sum amount which would include both the cost of construction and the land, however GST now mandates the buyer to pay taxes on the lump sum value. This has become a bone of contention within the real estate industry.
Ready to move in houses
Developers estimate that home buyers would have to shell out a higher amount for ready- to- move in flats as the option of acquiring full input set-off credit is not applicable to ready-to-move-in-flats. Further as these projects are out of the scope of GST, developers would have to bear the tax burdens involved.
With the Works Contract attracting around 18% and most of the construction material being under the 18 and 28 percent slab, the availability of input tax credit should neutralize the overall impact on cost of construction. However, the input tax credit is limited to 18% and no overflow is allowed while claiming the credits.[v]
Effect on Home Loans
Home loans are estimated to become more expensive to borrowers as the GST applicable on home loans will now be levied at 18%. This rise in rates will result in banks and lenders increasing their rates of interest too.
GST on Renting of Property
Renting of residential houses[vi]is exempted under GST except when leased to a commercial enterprise and the rent received exceeds Rupees 20 lakh.
With the tendency of passing on tax burdens to the beneficiaries it is estimated that prices will sky-rocket resulting in a shift by builders to residential complexes over commercial complexes. Landlords will be worst hit as they are liable to 18% GST and an additional 18% income tax depending on the rate applicable.
GST Impact on developers
GST based on the philosophy of ‘one nation one tax’ is estimated to bring down the project cost of construction for developers, bringing more liquidity into the market and in turn lowering the price of homes. The free flow of credit for developers would also translate into an increase in margin in their hands. The actual tax effect is also considerably lower as compared to the previous one, due to the input tax credit on raw materials that builders get against payment of taxes on inputs like steel and cement.
The real estate sector being one of the second largest sectors in India after agriculture plays an important role in the economy of the country. The market is still in a vulnerable state and it would take a few months for it to stabilize but it is hoped to bring about more transparency into the system.
[i]The RERA and GST Era: Impact on Real Estate, Magicbricks, 29th June 2017, available at https://content.magicbricks.com/property-news/the-rera–gst-era-impact-on-real-estate/92310.html(last accessed on 29th October 2017).
[ii]The Central Goods and Service Tax Act, 2017, Sch. II entry 6(a).
[iii]The Constitution of India, Art. 279A(4).
[iv]The Central Goods and Service Tax Act, 2017, s. 22.
[v]GST, RERA to increase prices of residential property: Colliers Research, Financial Express, 3rd July 2017, available at http://www.financialexpress.com/money/gst-rera-to-increase-prices-of-residential-property-colliers-research/746997/(last accessed on 29th October 2017).
[vi]Notification No. 12/2017- Central Tax (Rate), Ministry of Finance, Government of India, 28th June 2017.
By Desiree Ann Fernandes, 4th year, BBA LLB (HONS.), Alliance University, Bangalore