The Real estate sector is one of the most pivotal sector of the Indian economy. Real estate sector plays a vital role in employment generation in India. It ranks second just behind agriculture. The importance of Real estate sector can be understood with its average 5-6% GDP contribution and stimulating demand for more than 250 ancillary industries.
The real estate sector had a substantial growth of 22% in its private equity investments from 2015 to 2016. At the time of the third quarter of 2016, there was a 9% increase in investment for residential properties from the previous quarter.
The One India, One Tax rule is all set to change the multiple taxation and ease a citizen’s investment in the real estate industry. GST would bring a lot of transparency in the real estate sector and minimize unscrupulous transactions. Under the current tax laws, VAT and Service tax charged by different Contractors and excise duty, entry tax, octroi is paid on the procurements. GST law will increase the margin in the hands of the contractor /developer by removing all the above-mentioned taxes. Now whether this benefit gets passed on to the end-consumer is unsure as pricing of real estate is driven by market forces than on costing principles.
The benefits of GST to different sectors :
- Cost reduction from manufacturers
- Cost reduction for logistics players
- Hub-and-spoke system
- Merger of smaller warehouses and development of new technologies
- Increase in the organized warehousing sector
- Reduction in transit time
Impact of GST on consumers :
- Completed properties do not attract service tax and so will have no impact of the implementation of GST.
- In case of under construction properties, consumers pay the following:
- Stamp duty and registration charges (which are state specific and which will not fall under the GST).
- Service taxes including Swachh Bharat Cess and Krishi Kalyan Cess totally adding up to 15% (since service tax is applicable on 25% of the agreement value, effective outgo translates to 3.75%. However, in the case of properties costing above Rs 1 crore or where the carpet area of the residential unit exceeds 2,000 sq ft, service tax will be applicable on 30% of the agreement value, translating to an effective outgo of 4.5%).
- VAT – state-specific charge, for instance Maharashtra charges 1% VAT on agreement value, while Karnataka charges 5.5%, Tamil Nadu and West Bengal do not charge VAT – VAT is expected to be subsumed under GST.
From the developer’s point of view :
Implementation of GST will result in lower construction costs. An Overall tax incidence on inputs like cement and steel is expected to decline, thereby leading to improved margins for the developer. However, whether these benefits are passed on to the consumer remains to be seen. Additionally, further clarity is required on the availability of input tax credit with respect to works contract which results in the construction of immovable property as it will determine its impact on the sector.
The impact of GST on real estate sector is expected to be neutral under GST. Though still, there is going to be a substantial benefit from GST as it will bring a lot of required transparency and accountability. Developers/Contractors would reap the benefit of many taxes which will be subsumed by GST.