GST – Simplifying Taxation in India’s Complex Residential Real Estate Sector

“One Nation, One Market, One Tax” was the driving principle behind the passing of the GST bill. GST has become one of the most revolutionary tax-reform India has seen in decades. It will almost certainly have a profound effect on the Indian economy; making it easier for businesses and retailers to comply and moderate overall taxation levels that will inevitably increase the collection of taxes. The real estate sector contributes to 5% of India’s GDP and is the second-largest employer in the country. However, indirect tax levies, such as VAT, service tax, excise, stamp duty and registration fees have been a significant hurdle in this sector. GST will simplify tax hurdles and minimize the scope for double taxation. This transparent way of taxation will benefit both the customer, industry and the tax collectors.

Under the ambit of GST, under-construction properties will be charged at 12%; this won’t include stamp duty and registration charges. Today different states impose different property taxes; GST will ensure the buyer pays one uniform rate across all states. To better understand the impact of GST on the real estate sector, let’s take a look at the current tax structure of some of India’s tier-1 cities.

	Bengaluru	Mumbai	Pune	Chennai	Gurugram
VAT	4.0%	1.0%	1.0%	2.0%	4.0%
Service Tax	4.5%	4.5%	4.5%	4.5%	4.5%
Stamp Duty	5.7%	5.0%	5.0%	7.0%	6.0%
Registration Charges	1.0%	1.0%	1.0%	1.0%	0.5%
Total Taxation	15.2%	11.5%	11.5%	14.5%	15.0%

The 12% rate on under-construction properties will likely bring down property rates. Developers will now be authorized to take input credits on the sale of property under construction against the taxes that are paid by the buyer. This will bring down the cost for the developers, and in-turn the developers will have to pass on this benefit to the customers. The anti-profiteering provision in the GST bill makes it mandatory for developers to pass on any tax benefits of GST to the customers.However, GST may not benefit luxury real estate. Top luxury apartments in Chennai, Mumbai, Bengaluru, Pune and other tier-1 cities are set to see a major increase in taxation as compared to affordable homes in the same locations because they aren’t given the full set-off in terms of the land component. As things stand, service tax is charged on 30% of the property value, but GST will be charged on the entire value of the property; making it increasingly taxing on luxury real estate. Notwithstanding the burden of taxation on premium furnishing, fittings, super quality of cement and other top-quality raw materials used in the luxury housing market will be significantly more than that used in the affordable housing segment.

The best possible advice for home-buyers and investors “is to wait”. Wait till the property rate on GST is finalized. Wait till the property rates on GST are finalized. At a time, when property prices are already not affordable in most suburbs, if the GST rate were to rise above 12%, the market will certainly take a hit. If you buy real estate when the markets are on the rise, it only benefits the builders. The right time to buy property is when the markets are down as this gives you the best rates, infinite choices, and loans with lower interest rates from banks.

This is a guest post by Dinesh Dhawde