GST, one of the biggest tax reforms in the country got a unanimous approval of both the houses of the Parliament. The deadline set by the Union Government for its implementation from July 1, 2017 seems to be on course. Some of the states have already ratified the bill while others are quickly expected to follow. Industry experts have given speckled views about how implementation of GST will impact the residential and commercial real-estate transactions.
We shall now evaluate the varied views to have a more detailed outlook of the issues involved so as to enhance our understanding about the same.
First, let us understand the current set of taxes that are applicable in a real-estate transaction in the current scenario.
If a customer is looking to purchase an under-construction property, the builder or developer will have to comply with the guidelines and levy a service tax and is obligated to deposit the same to the Central Government. This tax was not levied till 2010. The major reason for the same was a contract including the two parties; that is buyer and builder for construction of the residential or commercial unit was a disputed one as the contract also includes the value of land. Thus, the rules pertaining to taxes on work contract was not applicable on the construction site of a residential complex. However, the Finance Act, 2010 has given a new definition of construction of a residential building and converted it into a deemed service. Thus, the home buyers are now paying 3.75% of the unit cost as service tax.
If a customer takes a decision to purchase an under-construction property, he/she has to pay additional VAT in some of the states such as Haryana, Karnataka and Maharashtra. Builders and developers of housing societies need to levy value added tax and deposit it to their respective State Government. VAT has been a hot topic of debate and many of the States including Uttar Pradesh does not levy this tax. In addition to this, there is no uniformity of the percentage to be charged and varies across various States. This practice often makes it difficult for customers to buy a property.
Stamp duty is levied by State Government at varying rates, for registration of agreement of sale for transactions pertaining to residential real-estate.
Parenthetically, if a customer is opting to buy a ready to move-in apartment directly from the developer of the housing society, he/she would not be required to pay service tax and VAT, thus saving somewhere between 3.75% to9% of the cost depending on the state where they are buying a property in.
Now, let us enhance our understanding about how exactly GST will influence the three taxes stated above. Service tax will be substituted by State GST and Central GST, while Stamp duty will remain unchallenged as it will fall beyond the jurisdiction of GST.
In the present market scenario, there are primarily two open items because of which it is difficult to predict the exact impact of GST on real-estate transactions. First and foremost is the GST rate and second is the abatement of land value in aggregate value of under-construction residential unit. Let us begin by making some assumptions that might actually come true in the days to come. From the market predictions, it is estimated that GST rate for real-estate sector might be set at 18% as many of the industry experts back this rate and abatement of land is expected to be somewhere close to 25% of agreement value since 50% is estimated to be cost of goods and remaining 25% would be considered as a cost of service.
Based on the estimations, the effective GST rate for under-construction property will fall in the category of 12%. This rate is significantly higher when compared to the current rate of 3.75% to 9%. Hence, it is expected that the prices of under-construction property will increase with the implementation of GST from July 1, 2017.
But this might not hold true as robust implementation of GST would allow the developers and builders to take free credits of input tax paid, the cost of unit should at least reduce by as much as 20%. So, if the builders decide to pass on the benefit to the final consumer, which they will get as a result of GST, cost to end customer will actually go downhill. But, this transfer of profit to final consumer is a questionable topic and requires a lot of introspection.
In the current market scenario, the cost of under-construction residential unit is likely to increase post implementation of GST. This will be a substantial blow to the industry that is already witnessing declining sales. Industrial unions and real-estate bodies would have to engage with the Government on urgent basis that will enable them to devise future course of action.
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