One of the biggest industries in India is the real estate industry. It contributes between 6% and 8% to the country’s GDP. In addition, the real estate industry is right after the IT industry when it comes to the Indian GDP. Before GST, there were multiple taxes, often leading to tax evasion or under-invoicing of real estate. Things have changed drastically in real estate with the implementation of GST. Today, we are going to talk about the impact of GST on real estate in detail. So, let us scroll down and check out more details.
Pre-GST Tax Rates
Before GST, the tax would be paid on selling under-construction property. Multiple taxes were applicable, and we have listed the same in the pointers below.
- VAT – 1% to 4%
- Service Tax – 4.5%
- Registration Charge – 0.5% to 1%.
- Stamp Duty Charges – 5% to 7%.
Post-GST Tax Rates
As mentioned earlier, the taxes pre-GST were applicable only on the under-construction property. They did not apply to houses or commercial properties that were already completed. Even today, the GST only applies to under-construction properties, and you don’t have to pay GST if the property is already constructed. Here are the different GST rates applicable as per the scenarios. Please note that the input tax credit is available wherever the GST rates are applicable.
- Ready to Move Property Where Completion Certificate Has Been Issued – 0%
- Under Construction Properties (Credit Linked Subsidy Scheme) – 8%
- Under Construction Properties (No Scheme) – 12%
- Land Purchase – 0%
- Resale of Property – 0%
- Work Contracts – 18%
- Composite Supply of Works Contract – 18%
- Composite Supply of Work Contract (Government/General Public/Affordable Housing) – 12%
Impact of GST On Real Estate Buyers
Before the implementation of GST, the buyer had to pay different types of taxes, and this was certainly a problem. There was a variation in tax rates in every state, especially because the state levied VAT, Stamp Duty and Registration Charges. In addition, the developers were also liable to pay various taxes, and this cost was eventually passed on to the buyers. With the implementation of GST, the buyers had a respite, and it was just a single tax they had to pay now. If the property was fully developed, no tax was applied to them. The long-term benefit of the GST is helpful for the buyer, and it is a much-appreciated move.
Impact of GST On Real Estate Developers
In the previous section, we mentioned that the developer was liable to pay various taxes on the property, and the input tax credit did not apply to many of those. This complicated things for the developer and the burden of taxes was eventually passed on to the buyer. In addition, the developers had high administration costs because of the complicated taxation policy. The cost for the developer is reduced after the implementation of GST, and the major credit goes to the input tax credit system. It indirectly saved the buyer from a dual hit of taxes. The margins for the developers improved, and the administration cost was also reduced. Many developers use online invoicing to make this easy for themselves. There is also an impact of GST on the raw material, but we have already talked about the same in our article “Impact of GST on Construction Industry.”
Reverse Charge Mechanism & GST
Reverse Charge Mechanism or RCM exists in Service Tax Law and has also been borrowed from the same law as the GST. Under the GST, if the goods or services are obtained from a person not registered, then a registered GST person needs to pay taxes on their behalf. There are many services where the developer needs to pay the GST, and adjusting the tax payable under RCM is impossible. This is a negative impact of GST.
Input Tax Credit in Real Estate
We have discussed this earlier, and the best thing about the GST is the presence of the ITC for the developers. A registered person in the real estate sector can claim the input tax credit if they have a tax invoice/debit not and if they have received the goods or the services. In addition, the taxes should already be paid to be able to claim the ITC. Lastly, the goods or services should not have been used for personal use under the GST law to be eligible for ITC.
The implementation of GST has had a massive impact on the real estate industry. It has simplified the taxation structure, and at the same time, it has also led to a reduction in the cost of properties. Apart from this, the developers can take advantage of ITC in the GST regime. It is safe to say that the overall impact of GST on real estate is quite positive.