The homebuyers need to pay taxes on property purchases. To speak more clearly, they need to pay Goods and Services Tax or GST while buying flats. GST came into force in July 2017 and this short period has witnessed many changes in the tax regime. Here, we will have a thorough study on how GST has put an impact on real estate and home buyers.
Before Implementation of GST
To examine the impact of GST on real estate and home buyers, it is important to look back to taxes that were imposed before GST came into force. This includes many state taxes and central taxes which were imposed on buildings or throughout the process of construction. These taxes, in turn, increase construction costs and the builders also don’t have the option of any credit against these taxes. Some of these taxes are mentioned below:
- Value Added Tax (VAT)
- Central Excise
- Entry Tax
- LBT
- Octroi
- Service Tax
The builders had to bear the cost of all the above-mentioned taxes and these costs were used to get transferred to the home-buyers.
From the perspective of the buyers, they had very little knowledge about the taxes and the applicable rates. Therefore, it often happened that the developers manipulated them while selling them flats. In such cases, the developers gained the most advantages in an unethical manner.
After Implementation of GST
Finally, on July 1, 2017, India witnessed the biggest tax reform. With GST coming into action, many indirect taxes were subsumed. This provided uniformity to the taxpayer. During the initial phases, the taxes for real estate were kept higher but after 2019, the government has cut down the rates. The step of reducing the taxes on real estate was taken with the aim of making properties more affordable to every common man and to reach the goal of “Housing for all by the year 2022.
What Are Some of The Taxes Subsumed by GST?
As already mentioned above, GST has subsumed many central and state taxes. Central taxes like Excise duty, Customs Duty, Service Tax, Special Additional Duty of Customs, Central Sales Tax, etc are subsumed as GST has come into play. The list also includes multiple state taxes like Luxury tax, State Excise Duty, Entertainment Tax, Purchase Tax, Tax on advertisement, Taxes on lottery, and many more.
What is The GST Rate on Real Estate?
In order to raise the demand, the government has taken the decision of reducing GST rates on properties. Experts believe that this will be helpful to the buyers in the overall purchase by around 4% to 6%.
| Type of Property | Till March 2019 | From April 2019 |
|---|---|---|
| Affordable | Maria Anders | Germany |
| Non-affordable | Francisco Chang | Mexico |
ITC stands for Input Tax Credit. From April 2019, the tax rate on all the new projects will be without Input Tax Credit. However, for the ongoing projects, the builders and developers were given a choice to choose any of the two tax regimes for their projects. This was applicable to projects which were incomplete as of March 31, 2019.
What is The Impact of GST on Buyers?
Earlier, the buyers had to pay multiple taxes like VAT, Registration charges, Service Tax, Stamp duty while purchasing any new properties. As these taxes were levied by states, the cost of properties differed largely from state to state. Apart from these, the builders also had to bear the burden of other taxes like sales tax, OCTROI, customs duty, etc. The concern for them was that the credit for these taxes was not available to them in the long run.
On the other hand, under the new tax regime, only a single tax rate of 12% needs to be paid on properties under construction. Moreover, unlike under the previous tax regime, GST is not meant for properties that are already completed and are ready for sale. Therefore, the impact of GST on the buyers is beneficial as it involves the reduction of prices.
The impact of Goods and Services Taxes on buyers is positive in the long run too, in case the developers pass on the benefit of the input tax credit received to the buyer.
What is the Impact of GST on Builders or Developers?
Before July 2016, the builders had to pay multiple taxes like Excise Duty, VAT, Customs Duty, Entry taxes, etc. on various raw materials. They also had to pay service taxes on input services which included labor charges, legal charges, etc. Also, Input Tax Credit (ITC) was not applicable to Entry tax, Custom duty, etc. All these factors had a great impact on the final pricing and as a result, this heavy burden was shifted to the buyers.
On the other hand, after GST, the above-mentioned taxes are subsumed which resulted in a significant reduction in the cost of construction. Moreover, a reduction in the cost of logistics is another plus point. All these factors have resulted in the improvement of margins for the builders.
However, to speak of a disadvantage, the builders need to do multiple calculations to get the final ITC so that they can pass it to the buyers. So, mostly, the ITC passes to the buyers during the final phase. Hence, there is a lack of transparency in ITC that may highly impact the builders as most of the buyers have the tendency to “wait and watch” before making the decision.
What is an Input Tax Credit (ITC)?
One of the most unique features of GST is an input tax credit (ITC). This is the feature that makes it different from the earlier tax regime. From the beginning of construction to the completion, a developer needs to pay multiple taxes. Under the new regime of GST, the builder will receive the input tax credit whenever he pays output tax.
What is the Impact of GST on an Affordable Property?
The most important as well as a positive impact on GST is that it assures clarity to the buyers. The buyers now have a clearer idea about their tax liability as compared to the earlier regime. This, in turn, leads to greater transparency and the buyers have more faith in the real estate sector. Also, GST has made properties more affordable to people. The table given below will make the scenario clearer:
| Affordable Housing | GST before April 1, 2019 | GST after April 1, 2019 |
|---|---|---|
| Cost per sq. ft. | 3000 | 3000 |
| GST Rate on Flat Purchase | 8% | 1% |
| GST | 240 | 30 |
| ITC Benefit at The Cost of Rs 1500 at 18% | 270 | NA |
| Total | 3510 | 3030 |
The government has offered an additional benefit of Rs 2 lakh for the buyers of affordable property in the interim budget of 2019. All these advantages, along with the positive impact of GST have boosted the buyers’ sentiments. As the demand increases, the developers will find it easier to sell off their stock and don’t have to stress much about paying taxes on inventory.
What is the Impact of GST on Luxury Property?
In the case of luxury properties too, the buyers will save more as compared to the previous tax regime.
What is the Concept of RCM?
RCM stands for Reverse Charge Mechanism. This concept has been taken from the erstwhile service tax law. As GST has come into action, the role of RCM has widened significantly. This has an adverse impact on the builders and developers.
The most significant addition to RCM is that if goods or services are taken from a person who is not registered under GST, the GST needs to be paid by a registered person for all the goods and services procured.
End – Notes
It is indeed true that GST has brought about great changes in real estate. GST has a great impact on the real estate sector. The homebuyers are getting more transparent services in this new tax regime. If carefully observed, there are a few loopholes in the new system but these can be easily managed. To look at the positive side, the buyers are benefiting as GST has resulted in the reduction of prices.
However, a little more clarity regarding the Input Tax Credit will make matters even better in the long run. This is keeping in view the fact that is often difficult for the developers and builders to complete the construction projects on time. This has become a more serious concern due to the monetary pressure on the developers which has further worsened due to the demand slowdown.
The real estate companies of India have felt the impact of GST on the real estate sector. For instance, certain real estate companies in Chandigarh and real estate developers in Mohali have well-observed the impact of GST on real estate and home buyers.
However, if you need any advice, there are many reputable real estate companies in Chandigarh providing excellent services. These developers can help you with any of your queries regarding real estate. Also, real estate developers in Mohali can be helpful to you.
