As the country switched to the newly unified tax reform of GST on July 1, it is set to affect every facet of our spending, including property and real estate. The new tax regime unified over a dozen of central and state taxes, including excise duty, VAT, and service tax. As the purchase of property is one of the biggest financial decisions of a person, it is important to know how GST will impact the property sector of the country. Whether you are a buyer, builder, developer, financier or investor, GST is set to influence everyone in many ways. Will property prices come down or will it become even more expensive? Let’s look at the impact of GST on the property.
New tax rates as per GST
As per the tax rates declared under GST, properties under construction will be charged at 18% tax which includes 9% SGST and 9% CGST. However, the government also permits a deduction of land value equivalent to one-third of the total amount charged by the developer, resulting in an effective tax rate of 12%. As far as construction materials are concerned, cement will be taxed at the rate of 28% under GST, iron rods and pillars at 18%, and bricks at a rate of 28%. Tax rates of construction materials are more or less the same, without any significant change. Moreover, stamp duty and registration charges are currently exempted from GST, but there is a possibility that they may be subsumed into GST in the future.
Ready to move-in flats to get costlier
Get set to shell out more money for ready to move-in flats. After the implementation of GST, developers with large unsold properties are planning to pass on the increased tax load to customers. However, the new flats will cost less, giving a sigh of relief to both the home-buyers and the developers of the upcoming projects. GST also provides an option of getting full input set-off credit but it is not applicable on ready to move-in flats. As a result, either the developers will have to bear the burden of the higher tax or prices of the ready to move-in apartments will increase to the extent of taxes.
Impact on property buyers
All the under-construction properties are set to be charged at 12% under the GST regime but this will not be applicable to completed and ready to move projects, which will create initial hassles for the buyers. This is because no indirect tax is applicable in the sale of such properties. In addition, the tax of stamp duty and registration charges on the buyer will continue in case of under-construction properties. The biggest takeaway for the home buyers under GST is the simple and transparent tax regime applied to the purchase price.
Impact on developers
A property developer is subject to central excise duty, VAT, entry taxes levied by a state on construction material cost, and much more. Moreover, a developer has to pay a service tax of 15% on the services used like labor charges, approval fees, architect charges, legal fees, etc. The developers also have to face the multiple taxation systems and all this accruing burden eventually gets passed on to the buyer. Though with the implementation of GST there may not be any significant changes in the construction materials tax rate, the lower transportation and logistics cost under GST will reduce the overall cost, thus, benefiting both the buyer and developer.
The impact of GST on properties is expected to be neutral. Though the implementation of GST might disrupt the real estate operation with some short term challenges, more clarity is expected to emerge once the government clears its stand on the abatement for the land cost and service tax on under construction properties. As far as premium projects in cities are concerned, property prices are likely to rise. It can be concluded that the property sector will benefit from the new tax regime of GST in the long run.