What is the impact of GST on Real Estate

GST – a brief introduction

The Goods and Services Tax (GST)—India’s biggest tax reform post-independence was implemented on 1 July 2017. The new tax regime seeks to transform the Indian economy with its ‘One Nation, One Market, One Tax’ principle by subsuming a host of indirect taxes charged at varied rates by the Centre and states, therefore bringing uniformity in taxation across the country. Its primary objective is to simplify the complex tax structure on the supply of goods and services. While this reform may have certain short-term negative impacts on the economy, it will have long-term benefits for the country

Impact of GST on residential property prices

The new GST rates on residential real estate transactions have been proposed as follows:

• GST to be charged at 5% without Input Tax Credit (ITC) on residential properties that are not part of the affordable housing segment.
• GST to be charged at 1% without ITC on residential properties that are included in the affordable housing segment.
• On all supplies provided on or after 15 November 2017 when the rate of tax was reduced from 28% to 18%.

General Overview

While there is a reduction in the total tax component of inward supplies of materials, there is also a corresponding increase in the tax cost on services received. However, with unrestricted flow of credits available under GST, as compared to restrictions under the earlier regime, developers shall benefit with a higher credit pool and therefore, from the government perspective, be required to pass on such benefits to customers by way of reduced prices. It may also be noted that the GST law requires businesses to mandatory pass on benefits derived from any reduction in the rate of tax or benefits of input tax credit to customers. With regard to the real estate sector, on the one hand, the industry is grappling to determine the actual benefits on account of GST and, on the other hand, there is lack of clarity on haw the benefit, if at all any, has to be computed (the period to be considered, the factors to be considered, etc.). The government has been very aggressive, especially with the real estate sector, to investigate businesses for non-compliance of anti-profiteering provisions. Against this backdrop, businesses should take appropriate steps to evaluate the quantum of benefit to be passed on the methodology for passing on such benefit, if any, to customers. There is a possibility of the market perceiving GST to be a ‘by default’ agent for a price drop for all projects, whereas the actual factor for such price reduction is business and market requirements. The table below provides a comparison of the taxability of various inputs pre and post GST implementation and its likely impact on project costs.

GST on Construction Services

Construction services also feature taxes that are applicable to various real estate transactions that can be considered as part of how GST on Real Estate is applicable. The following is a snapshot of GST rates applicable to select areas of construction-related services in the real estate sector*:

Conditions for Claiming Input Tax Credit in Real Estate

Subsequent to introduction of GST in real estate, as per GST Act rules input tax credit (ITC) equal to total tax paid may be claimed by real estate developers in the following cases:

• The claimant can produce a debit note/purchase invoice/tax invoice as proof of GST being deducted.
• The goods/services (or both) have already been received by the claimant.
• The ITC claimant has not used the goods/services (or both) received for personal use.
• All taxes that were due has been paid to the government by the supplier.
• A valid GST return has been filed by the ITC claimant.

Source : PaisaBazaar