Delivered on July 1, 2017 as a masterstroke poised to iron out the complexities of multiple taxation in India, GST (or Goods & Service Tax) completed one year of its implementation.
The idea was to create a unified tax regime, or one single tax to subsumeall the various levels of taxes such as central excise duty, VAT, OCTROI, service tax, etc. Naturally, it has had a great impact on various sectors and industries in the country, including real estate.
The highlights of GST’s ‘one nation, one tax’ policy at its launch included the introduction of Input Tax Credit for real estate developers which can be availed by them in lieu of the taxes paid on construction material and services, facilitating a quicker recovery of the sector, and easing business transactions. So, how has GST in construction and real estate industry fared so far? Let’s take a look at the key pointers that summaries its impact:
The reduction in GST from 12% to 8% of properties up to 60 sq. m. carpet area in the affordable housing segment under the Pradhan Mantri Awas Yojana (PMAY), has not had a significant impact on reduction of tax burden for home-buyers, even after taking into account 1/3 rd abatement towards the cost of land.
Developers’ construction costs have seen a marginal fall due to elimination of double or triple taxation as they are now entitled to Input Tax Credit against the construction material purchases. This has made construction cost management easier.
However, as mentioned earlier, the ineffectiveness of anti-profiteering provisions means that end-users have not received the benefit of this Input Tax Credit system. Only when the base property price will go down and developers start passing on tax credits to customers will this move bring some relief to home buyers.
Under GST regime so far, while under-construction projects have been charged a GST of 12% with complete input tax credit, ready-to-move properties with valid completion certificates are not taxable for home-buyers. This has led to a decline in home-buyers investing in under-construction properties which were earlier considered to be lucrative.
On the other hand, ready-to-move properties are gaining favour in the market since they offer immediate possession, attract no GST, and provide relief from uncertainty of construction-linked home loan EMIs.
After one year of complex tax filing mechanisms, the builders and developers are seeking a more streamlined, simplified and structured process, especially for legal protection against defaults.
GST has definitely brought transparency and accountability to the real estate sector by minimizing shady transactions. Investor sentiment has also seen a surge thanks to tax predictability, streamlining, and the emergence of warehousing as an important real estate asset class.
Thanks to GST and RERA, realty IPOs have returned to the equity capital market after a gap of eight years. As GST continues to become much more streamlined and refined, the real estate sector will witness more formalization.