The implementation of the Goods and Services Tax (GST) in India in 2017 was met with a considerable amount of confusion and speculation.
The impact of the GST implementation on the real estate sector, in particular, was discussed continually, especially considering how it makes up 6-8% of this country’s economy. The real estate sector is considered to be one of the country’s most lucrative sectors, which is why it is imperative to discuss the impact of the Goods and Services Tax on real estate.
Real estate is now being taxed at 5% but was initially taxed at 12%. Let us see take a look at GSTs implementation in India and its effect on the various elements of the real estate sector.
Benefits of GST
The following showcase some GST benefits:
- One of the primary drawbacks of the old tax system was double taxation or the cascading effect of a collection of indirect taxes. Indirect taxes, such as VAT were imposed at various stages and would differ in different states. As a result, there was a significant increase in the prices of goods and services.
- Secondly, tax calculations under the previous tax system were incredibly complex and tedious, given the sheer number of taxes that were levied at various stages for various categories of products and services. However, the implementation of a single, unified tax like GST has rendered this problem moot.
- Additionally, GST also lets you register for a GST composition scheme that assists relatively small businesses, increases logistics efficiency, and E-commerce.
How has GST affected Buyers?
Buyers would face the brunt of paying a slew of taxes like the Value Added Tax (VAT), Services Tax, Registration charges, and so on under the previous tax system.
The taxes mentioned above would differ with every state, and developers would have to file taxes like customs duty, sales tax, and more. However, with the GST in place, a single GST rate of 12% was applied to properties under construction effective from April 1st, 2019, which benefits buyers. GST will probably benefit buyers in the long term if the benefit of the Input Tax Credit (ITC) is passed from the developer to the buyer.
The Impact of GST on Developers and Builders
Under the old tax regime, developers would have a burdensome time filing taxes like VAT, excise duty, customs duty, raw materials, service taxes, and many more on a group of essential services.
ITC was not an option for the aforementioned taxes under the old tax structure. In other words, these charges were added to the overall pricing. With the advent of the Goods and Services Tax, one can notice a decline in the developers’ construction costs because of the subsumption of a slew of taxes and the option of Input Tax Credit. GST’s implementation has also resulted in reduced logistics costs.
On the downside, developers have no choice but to perform several complicated calculations to drum up the ITC to send the buyers. In other words, the ITC may be passed to the buyers at the last stage.
The lack of transparency around ITC has led several buyers to defer their property purchases.
The Impact of GST on Residential Property
Here’s the effect that the Goods and Services Tax has had on residential property:
- GST is a simple and straightforward tax structure that translates to a higher level of compliance from builders and developers alike
- It solved the problem of passing ITC benefits to the purchaser, thereby minimizing the chances of property purchase delay
- GST has made sure of a feasible price for the buyer, because of the reduction of GST tax rate to 1% on residential properties
- The final benefit is the reasonable pricing of residential properties because of the elimination of unused Input Tax Credit from the project expenses.
Studying its impact on the real estate sector is an excellent place to start if you were curious about GST’s implementation and effect on the Indian economy.