Impact of GST on Real Estate
Though it is too early to assess the real impact on the residential construction services, the application of 12 percent slab on developers selling residential units before completion of construction to the home buyers itself opens up a debate.
With input cost credits available, developers are likely to register improvement in margins in case no price revision occurs. If developers pass on the input credit to buyers, the property price rise could be limited to 2 percent. If developers pass on the credits completely and lower the base rates, home buyers derive marginal benefit. Stamp duty remains applicable – irrespective of whether the property is under-construction or constructed. Therefore, a critical assessment is required in this regard.
Will GST Bring Relief to Home Buyers?
The impact of GST on property prices is complex to measure because of the lack of clarity on abatement for land value. As the major raw material is not covered by the GST and the completed unit is also not covered by the GST, calculating the tax input benefit is tough. The market forces decide how much benefit will be passed on by the developers to flat buyers.
Besides, the volatility of prices of input materials can make a big difference. Cement and steel prices soar unpredictably. Also, sand is in short supply in the monsoon season.
Another key factor that needs investigation is the stage of construction. If the project is at an advanced stage, where substantial cost has already been incurred before the application of the GST, negligible input credit will be available and marginal benefit will be passed on. If the project has just started, handsome benefits can be delivered to buyers.
GST on Under Construction Property – Affordable Housing
It is worthwhile to note that if GST exemption is offered to affordable housing projects (affordable housing is exempted from service tax and a clarification is due for exemption from GST), affordable homes are set to become easily affordable under the GST regime.
Impact of GST on Property Prices – Luxury Segment
Premium properties will undergo downward revision of the basic construction cost. As the input tax credit is limited to 12 percent, it does not suffice to bring down the fresh tax liability to nil because of the taxes paid on other expenditures. Many construction materials are under the 18 and 28 percent slab. As the input tax credit is available, the overall tax incidence should be neutralised.
Reverse Charge Mechanism in GST and its Impact on Construction Costs
The recipient of services pays the service tax, and it is called as ‘reverse charge mechanism’. This concept is borrowed from the service tax laws in the Goods and Services Tax (GST) regime.
A developer has to pay GST on services availed, like those provided by a person located in a non-taxable area, services provided by goods transporters, legal services provided by an individual or firm. The developer has to pay GST under the reverse charge mechanism – on the services provided by government or local authorities. The RCM ambit has been widened for taxable people. It will adversely affect the developers. The tax payable under the reverse charge mechanism under the GST cannot be adjusted by the developer against the input credit available from the GST paid on the inputs. This augments the costs for small developers who were availing goods and services from unregistered suppliers and were not bearing the cost of taxes to that extent.
GST on Ready Properties
Under the GST regime, cement and steel will be taxed at 28 percent and 18 percent. Paint and white goods will be taxed at 28 percent. The final product – the housing unit – will be taxed at 12 percent, with credit for taxes paid on inputs. And the tax levied on the entire cost including the land will be 12 percent. A buyer opting for a ready-to-move-in apartment is saved from the tax burden.
The tax calculation under the GST regime for the real estate market is not simple. GST on under-construction projects charged to home buyers on the sale price. But the credit is availed by the developers only on the cost of construction. As the builder has to pay the GST on the full project and the input availed is only on the construction cost, there is a gap of at least 30 percent. So the developer will hike the prices to reduce this gap.
Grey areas Determine Property Prices
The abatement available for the land cost is not clear for calculating service tax on under-construction projects. The abatement rules – as applicable under the service tax regime and the input tax credit facility for developers – determine whether the actual tax incidence is lower or higher under GST.
Will GST on Real Estate Benefit Home Buyers?
Bringing real estate under GST net will benefit consumers – one tax on the complete product. If the GST slab for real estate is fixed above 12 percent, home buyers and developers get additional burden during a period when property prices have become unaffordable in many cities.