Impact of GST on Indian real estate sector

Published By Avalara India, 20 Sep 2017

The long-awaited revolutionary tax has finally been introduced. GST seeks to transform India with its “One Nation, One Market, One Tax” principle, and all signs indicate that India’s real estate sector won’t be left out of the transformation.

The real estate sector is one of the most pivotal sectors of the Indian economy. It is the largest employer in the economy after agriculture, contributing an average of 5-6 percent to the GDP — a contribution that is set to grow at a compounded annual growth rate (CAGR) of 30 percent over the next 10 years. By one account, the sector will be worth a staggering $180 billion in revenues by 2020.

In the past, the real estate industry was embroiled in disputes due to ambiguity in provisions as well as multiple taxation. GST is expected to simplify taxation compliance and have a positive impact on the industry as a whole.

Impact on real estate buyers & investors

Under the earlier law, buyers were liable to pay taxes depending on the construction status of the property, i.e., whether the property was under construction or complete. When purchasing a property under construction, a buyer was subjected to the payment of VAT, service tax, stamp duty, and registration charges. Properties purchased after completion were exempt from VAT and service tax, and only stamp duty and registration charges were payable. Moreover, the state where the property was located was also a relevant consideration because VAT, stamp duty, and registration charges — all being state levies — varied from state to state.

The biggest takeaway is that GST is a simple tax that applies to the overall purchase price. All properties under construction will be charged at 12 percent of the property value. This excludes stamp duty and registration charges. For completed properties, the earlier provisions will continue and buyers will pay no indirect tax on sale of ready-to-move-in properties.

Impact on developers

Previously, developers were liable to pay customs duty, central excise duty, VAT, entry taxes, etc. on construction material costs. They also had to pay a 15 percent tax on services like labor, architect fees, approval charges, legal charges, etc. Eventually, this tax burden was transferred to the buyer.

Under the new regime, however, the changes in construction costs are not as difficult. For instance, cement will now be taxed at the rate of 28 percent under GST. This is higher than the current average tax rate of approximately 23-24 percent, but a lot of additional taxes charged over the average rate will now be subsumed under GST. Iron rods and pillars used in the construction of......
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