One of the most critical pillars of the Indian economy is the real estate industry. The real estate industry contributes 6-8 percent of India’s Gross Domestic Product (GDP) and is second in job generation after the IT industry. GST impact on real estate industry can be seen with the expansion and growth of the real estate industry.
The Taxability of Real Estate Transactions before GST
The VAT was not available on completed or ready-to-sell assets. Under the former indirect tax system, Cenvat credit was also limited on materials used to build a building or a civil structure or any part thereof.
Impact of GST on Buyers
Under the earlier tax regime, buyers were required to pay VAT, Service Tax, Registration fees, and stamp duty on buying properties under construction. Because VAT, Registration fees and stamp duty were also state levies, and property prices ranged from state to state. Also, customers had to pay various duties for which credit was not eligible, such as sales tax (CST), customs duty, etc…
Under GST, a single tax rate of 12 percent applies to properties under construction, whereas GST does not apply to properties completed or ready to sell, as was the case in previous legislation.
Impact of GST on Builders
Under the previous tax scheme, developers had to pay excise duties, VAT, customs duties and entry taxes on raw materials or inputs and service tax on various input services such as approval fees, professional fees for architects, labor charges and legal fees. ITC was unavailable for duties such as CST, Customs, and Entry Tax. This would have an impact on the price, and the burden was subsequently transferred to the buyer.
Under GST, construction costs for builders are significantly reduced as multiple taxes are subsumed. Cutting down on transportation costs will also be an added benefit. Therefore, builders may see marginal improvement.
On the downside, builders need to do multiple calculations to arrive at ITC to pass it on to the buyers. Therefore they can only move on the ITC during the final stages in most cases. This lack of ITC clarity may affect developers as buyers can resort to the ‘wait and watch’ approach and delay purchase decisions.
And, a large portion of the expenses remained unrecorded in the books in the former laws. Under GST, credit availability on inputs and cloud invoicing storage has decreased under expenditure recording.
Impact of GST on Stakeholders
The impact of GST on allied services such as labor, suppliers of materials and service providers rely on the increase or decrease in the tax charged on these goods and services. That will have a consequential impact on the entire real estate industry.
Earlier cement, for example, was taxed at an effective rate of 27-31 percent, now taxed at 18 percent. Rising cement prices will result in a significant rise in overall construction costs.
Impact of GST on Mechanism
In cases where services are obtained from the transporters of goods, legal services provided from a person or company, services received from the government or local authorities, such as municipalities, developers must pay GST for the same.
Also, under GST, the developer may not adjust the tax payable under RCM against the GST input credit available on the inputs paid. Instead, it’s payable by cash or bank payment.
Impact of GST on Stamp Duty
Stamp duty and registration fees are excluded for the limited purpose of calculating GST.
As was the case with the pre-GST regime, stamp duty will continue to apply to both completed properties and under-construction properties.
Impact on Developers
Previously, developers were liable on construction material costs to pay customs duties, central excise duty, VAT, and entry taxes. They also had to pay a 15 percent tax on things such as labor, design fees, approval fees, and legal fees. This tax burden was eventually transferred to the purchaser.
However, under the new regime, changes in building costs aren’t as complicated as they were earlier. For example, under GST, cement will now be taxed at a rate of 28 percent. This is higher than the current average tax rate of around 23-24 percent, but GST will now subsume a lot of additional taxes paid over the average price. Iron rods and pillars used in building construction are now charged at a rate of 18 percent, which is lower than the previous 19.5 percent average.
A considerable percentage of each property project expenditure went unrecorded in the books before GST. GST would slash the rate as a result of cloud invoice storage.
As this sector has stimulating demand for more than 250 ancillary industries, the real estate sector will also benefit from the new tax law having a positive effect on all auxiliary sectors.
Under GST, an ISD definition for moving input services tax credit between two or more locations has been introduced. Any supplier of goods or services may qualify as an ISD. An ISD may transfer credit to all GST types, including CSGT, SGST, or IGST. Moreover, any supplier of goods or services may be an ISD. Considering the possibility of multiple state registrations, an ISD could be used as a tool to ensure optimum use of the credit-related to the head office, resulting in real cost reduction. Also, assessing a reasonable size having an ISD facility will be required to file 61 returns in one year.
Given the new complexities of enforcement for the real estate industry under GST, companies will need to make appropriate changes to their IT systems to be able to comply with GST. You get to know what is happening in the real estate world by checking the latest GST news and updates. Also, the 2016 Real Estate (Regulation & Development) Act would create an entirely new automation need. Automation will deliver a wide range of benefits, including timely compliance, report generation, report comparison, decision-making, cost-effectiveness with reduced personnel, technical and online support, and more.
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