The Effect of GST on Indian Real Estate

The implementation of the Goods and Services Tax (GST) is expected to bring about a major transformation in the taxation structure of India. Currently, the central and various state governments impose taxes on the manufacture and purchase of goods and services. The all-encompassing GST is supposed to do away with the various taxes that burn a wide hole in people’s pockets and prevent double taxation. At present, consumers bear a 25–30% of tax burden on purchase of goods. GST is scheduled to come into force on July 1st this year.

As much as the benefits of this new tax regime are widely spoken about, it is still not clear how GST will impact the real-estate sector, especially low-cost and affordable housing.

Real-estate experts across seem to be trying to get their heads around on how this sector is expected to get impacted by the implementation of GST. The three primary taxes that are levied in this sector are Service Tax, Value Added Tax (VAT), and Stamp Duty. GST is expected to replace the first two, while the third one remains as is.

To understand this GST - real estate conundrum, we shall break down the components of taxation in the sector. Firstly, let’s understand that Service Tax, which goes to the central government, is applicable for only properties that are under construction. This tax is levied on a percentage of the total price of the said property. Land cost is not included in the calculation of Service Tax. Hence, currently there is a 75% abatement on under-construction properties valued at less than Rs 1 crore and 70% on such properties that cost more than Rs 1 crore, like high-end luxury apartments in Bangalore. In both these cases, Service Tax is calculated on only the remaining 25% and 30% of the gross value of the property.

VAT too is applicable on properties that are being constructed, but are payable to the state government. This tax is levied on the sale of the house property and involves the transfer of ownership to the buyer. However, this tax structure varies from one state to another, in the range of 1–5%. Experts are of the opinion that the implementation of GST will not only simplify the tax structure in real estate, but also reduce the scope for litigation.

Stamp duty, which is not going to be included in GST, is calculated as a percentage of either the agreed value of the property or the minimum price at which the property can be transacted, depending on which value is higher. Some experts believe that stamp duty is a good revenue-generator for state governments and is therefore kept away from the ambit of GST.

Going by the understanding of GST vis-à-vis real estate, experts believe under-construction properties to be pretty expensive after July 1, 2017. Nevertheless, they suggest to wait and watch until the designated date to see the rate of GST to be implemented and its resultant impact on real-estate prices before making conclusions.

This is a guest post by Dinesh Dawde