By Sukhraj B Nahar, Chairman and Managing Director, Nahar Group June 23, 2017
After several reform initiatives like Housing for All and Real Estate (Regulation and Development) Act (RERA), the next thing that real estate is looking forward to is the Goods and Services Tax (GST).
Set to be implemented on July 1, 2017, GST has prescribed different rates for various goods and services, which may impact their cost. A homebuyer, henceforth, will have to pay 12 percent GST to purchase an under-construction house.
A single tax structure is definitely a welcome move. While the impact of GST on various sectors and goods is now known,industry experts are still divided over how GST will impact real estate going ahead, as clarity on the tax slabs for services is still awaited.
Benefits to the sector
Together with RERA, GST will go a long way in ensuring transparency in the realty sector and boosting buyer confidence. The existing channels include issues of multiple taxation, amounting to indirect taxes and no uniformity. GST coupled with Real Estate Regulatory Act that has come into effect on May 1, 2017, would ensure efficiency in the realty sector. GST will free homebuyers and investors from the hassle of paying several state taxes at different levels, therefore, removing the impact of double taxation. Therefore, 12 percent tax under GST regime looks favorable to the industry.
Also, GST would help cut down cash component in construction, as inputs have to be obtained from registered vendors to get input tax credits. For the construction of a complex building, civic construction is under the 12 percent tax bracket with full input tax credit (ITC) subject to no refund in case of overflow of ITC. Greater efficiency in logistics should also help reduce prices of goods.
In some cases, even input credit will be more than the GST levied on the finished product, but a developer can claim a maximum credit to the extent of the GST he would be paying on the finished product. It can be expected that GST may lead to input cost deflation for the construction industry as credit of taxes paid on various inputs used in the construction activities will be available, which is not so in the current tax regime.
While under GST, the tax rate on under construction flats will increase to 12 percent from the tax under the current regime i.e. 5.5 percent (service tax and VAT in Maharashtra) but the input tax credit made available to promoters/developers will reduce the impact. Also, GST will subsume various taxes like VAT, service tax, excise duty, entry tax, octroy, etc. will also help to reduce administrative cost of developers.
Boost to investment
GST is also likely to boost foreign investment and benefit the Non Resident Indian (NRI) community for investment in real estate because of a seamless all-inclusive channel available. The simplification of taxation is probably the most positive aspect of GST and it bodes well for foreign investments. It will also raise the confidence of the NRI market to invest in Indian real estate.
What about consumers?
From the consumer point of view, the major advantage would be in terms of decrease in the overall tax burden on goods. Currently, it is estimated to be about 25-30 percent. GST will help in free transport of goods without stopping at the state borders for long hours for payments of state tax or entry tax. This will reduce in paperwork to a great extent as well.
Residential and commercial segments
Impact of GST may vary according to the type of project and construction methods as only under-construction flats are taxable under GST and input credits on sales of under construction flats are available for set off. At this stage, it is difficult to comment exactly which type of projects will witness greater impact and benefits. Therefore, to analyse the type of project beneficial under the new tax regime, it is advisable for real estate developers / builders and promoters to conduct GST impact analysis programmes before implementing GST system.
As per the provisions of GST ITC rules, input taxes paid on various elements used for the business (in our case, construction activities) will be available to be offset against the tax liability i.e. GST collected from the buyers against the sale of under-construction flats, subject to certain restrictions. It can be said that developer or promoter needs to pay only the differential tax liability to the government.
Since the tax incidence on various stones, aluminum, glass, ceramic, lamps and fittings are in the bracket of 18-28 percent, it can be expected that cost of luxury projects and commercial projects may rise if input set off is not utilised properly. In such a case, the higher rate of tax will lead to an increase in the cost of construction activities.
Following are the comparative statement of taxes of major construction materials:-
|Items||GST Rates (%)||Existing Rates* (%)|
|Paints and varnishes||28||26|
|Putty, wall fittings||28||26|
|Sand lime bricks, fly ash bricks||5||6|
* Based on Maharashtra VAT; may vary from state to state.
Under the current VAT system in Maharashtra, tax exemption is not available to affordable housing schemes. As per the announcement by finance ministry, it is expected that there will be no tax under GST for housing projects which come under affordable housing. Also, inputs and input services used for projects covered under affordable housing scheme should be exempted to avoid extra burden of tax liability. This will ensure that the cost inflation impact is not passed by promoters/developers to customers who purchase residential units under the affordable housing scheme.
Publication / Source of Article: 99Acres