Will the implementation of GST have a major impact on real estate industry?
We have seen a phenomenal growth in Infrastructure Industry in the recent past, not just in Metro Cities but also in the Tier 1, Tier 2 & Tier 3 cities. The Real Estate industry therefore, is in the cusp of increased regulations, with bills such as the Real Estate (Regulation and Development) Bill, pending for approval in the side lines. The implementation of GST will have a vital role in the Real Estate development.
VAT and service tax has been applied on construction services for OVER A DECADE. issues like transfer of development rights in land, joint development taxation, taxable value for goods & services remain unresolved even today impeding the smooth flow of the Real Estate industry. With GST expected to come into play by mid 2017, there should be a more structured process of registering and transferring immovable property.
Service Tax & Vat
Service Tax & VAT are the two primary levies in the real estate industry across India. This means a developer has to go through multiple processes for both these taxes to be adhered to, resulting in loss of precious time, money and peace of mind. GST is hoped to ensure that there is a single, uniform taxation practice across the country thereby creating a structured and uniform law across the country.
GST impact on Residential properties
Home buyers pay service tax and VAT on purchase of residential units when booked prior to their completion. Various other elements of non creditable tax cost like excise duty, customs duty, CST, entry tax etc. are paid by the developer or builder on the which is included in the unit cost of property. .Total expense equals 22 -25% tax cost of the price of the units,
The proposed GST should…
Smoothen the flow of procuring the property
Speed up the development as a single tax levy.
Benefits to Developers
Reduction in cost of construction thereby allowing an even great focus on quality and value based prices. If the GST decides to act tough, the only dampner could however be high GST rates (like the 27% GST rate that is doing the rounds) which will offset any possible gains on incremental credits.
Stamp duty is not assumed as a part of GST and hence will continue as it is today.
GST impact on Commercial properties
We’re assuming that the implementation of GST should have a significant impact for commercial property developers,
High costs as no credit is available on the construction services used for developing a commercial property,
The proposed GST should…
Smoothen the flow of credit and will remove the current restrictions on the construction related credits not being available for offset.
1. Reduced project cost for developers and hence buyers, which should have a positive effect on rentals. If the credit restrictions continue, due to higher GST rates, the project cost are only going to get escalated further.
2. Business entities, including the trading companies should be able to take credit of the GST paid on the rentals, which in turn should help the developer community in negotiating better rentals.
Please Note: Under the current regime, service tax on rentals to traders is not available as a credit.
Impact of GST on SEZ
SEZ projects should by and large be neutral as the present exemptions on the procurement side should transition into GST as well. It is expected that supplies of goods and services to SEZ developers and units will be zero rated.
Under the GST regime, special focus would be required on the taxability of landlord-developer transactions, especially on the taxation, valuation and timing for payment of taxes on such transactions and also on the liability of landlords for sale of their portion of constructed area before completion of construction.
Overall, we hope GST appears to be a benefactor for the real estate regime, primarily in light of the expected free flow of credit, which should translate into an increase in margin in the hands of the developer. Whether these benefits will percolate into the end customers / users is to be seen, more so because pricing in this sector is more driven by market forces than on costing principles. More importantly, as the GST regime is expected to impart greater transparency through market mechanism, it is imperative that real estate transactions form an integral part of the proposed GST design.
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*DISCLAIMER – All the information shared in this article are from external resources and SRaheja in no way advocates the expertise shared herein. All information shared herewith are subject to change in lieu of government stipulated regulations under income tax acts of Indian law 2016 – 2017