Since the passage of the GST Bill, there have discussions about it’s impact on the real estate market. At BWA we’ve been closely folowing this subject and in this article we try to simplify things for you with the help of some prominent sources from the industry.
If you’re looking to buy a house in the coming years, the implementation of the goods and service tax (GST) will have a dual impact on you – it will remove the cascading, also called, double taxation in the system, but will instead levy a higher Tax at the consumer end.
The proposed uniform tax regime, experts say, will rescue end consumers from the hassle of paying various state taxes at different levels, thus doing away with the double taxation impact.
However, on the other hand, the service charge levied on the purchase of the property is likely to push costs up a bit – today, one pays 15% – and the proposed rates are likely to be more on services.
Under current taxation system, under-construction apartments are treated as work contracts, so in order to tax its services portion only, an abatement of 60% of the total cost is allowed. Therefore, the net service tax liability is calculated at 6% of total cost (15% on the remaining 40%). Other than that, 1% VAT (value-added tax) is also charged.
Simply put, 40% of the total cost of the property is treated as “service” and taxed at 15% Service Tax (which in effect mean 6% on total cost) in addition to 1% VAT.
“GST will increase the overall cost of under construction property for buyers if the rate is higher than current applicable service tax rate of 15%. For states where VAT is not applicable till now, state GST will be charged. If the rate is relatively lower than 15%, GST can result in price neutral or lower price for consumer,” said Ankur Dhawan, chief business officer of PropTiger, a real estate portal.
But since a lot of the indirect taxes are paid by developers, a likely reduction makes a straight case for them to pass on the benefit to consumers.
“The goods and services tax is likely to be a game changer for the real estate industry… (it) is currently facing issues of multiple taxation, which amounts to over 25% in indirect taxes. With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them, which will reduce cost and can be passed as reduction to buyers,” said Brotin Banerjee, managing director and chief executive officer, Tata Housing.
Explaining further, Anuj Puri chairman and country head, JLL India said, “At present, in the case of buying an under-construction flat, one needs to pay both service tax (4.5%) and VAT (varies from state to state). Additional indirect taxes are paid by the developer during procurement, which get built into the cost of an apartment. Stamp duty (varies from state to state), which is payable on property transfers, is not going to be subsumed into the GST.”
The direct impact of GST on real estate, in terms of tax outflow for developers and consumers, will depend on whether the final GST rate is more or less than the rate paid currently.
“Apart from the significant reduction in tax management expenses due to a single unified tax, the compliance costs will go down too,” added Puri.
Whether the home purchase becomes costlier or cheaper will finally depend on the rates in the fine print of the bill once the GST Council clears it. Service rates, which are pegged to be higher than 15%, are likely to pinch your pocket, but, given that developers input costs will reduce, it makes for a clear case of price reduction. And not to forget, the hassle of paying different duties and taxes at various regulatory offices will be much more manageable.
All in all, GST is arguably the most important financial reform in decades. It is aimed at removing multiple taxation point and apply one uniform tax at the point of consumption. Hence, although the tax percentage may look high but the GST bill removes all the indirect taxes applicable before you and I get to purchase the goods or services.
In all, the GST is a benefit for home buyers!
We encourage all our users to comment on this article with their inputs and questions!
Disclaimer: The GST bill is yet to be implemented and above article is based on the information available as of today. The rates and and other fine details are awaited.
Article courtesy: Various news agencies. All pictures are the copy right of their respective owners. BWA has collected this information from various sources and presented it for their users.