The Goods and Services Tax or GST, launched on the 1st of July this year, is expected to revolutionise the Indian taxation regime and the economy at large.
The inclusion of real estate in the GST regime may prove to be a game changer for the sector. It is expected to usher in an era of better regulation, more transparency, cost reduction and homebuyers are likely to benefit the most from the new tax regime.
Here’s a look at the impact of GST on various aspects of home buying:
GST on under-construction properties
The GST rate for under-construction properties has been fixed at 18% with full Input Tax Credits (ITC). This includes 9% State Goods and Services Tax (SGST) plus 9% Central Goods and Services Tax (CGST). The government has also allowed the deduction of land value equivalent to one-third of the total amount charged by a developer. This brings down the effective tax rate for under-construction properties to 12%.
Developers might enjoy some benefits for projects that are in the nascent stage.
However, they will have to bear the tax burden for ready-to-move-in projects as they have been kept out of the GST ambit. This means that ready-to-move-in flats will be expensive under the new GST regime as they won’t get any benefit of ITC.
For homebuyers, it may be more cost-effective to invest in under-construction properties than ready-to-move-in homes.
Luxury homes to cost more
Raw materials such as glass, aluminium, monuments stones, ceramic fittings and lamps are extensively used in the construction of luxury homes. Under the GST regime, the price of all these materials will rise as they fall under the 18 to 28% tax slabs.
A higher rate of tax will push the cost of construction translating into higher pricing for luxury homes.
Impact on building materials
As far as building materials are concerned, the new tax system brings some substantial changes. While some materials cost lesser now, the price for most items has risen. These marginal variations can make a big difference to the cost of construction and result in more expensive homes for buyers. Here’s a look at the comparative taxes of major construction materials:
Impact on home loans
GST for home loans will now have a standard rate of 18% throughout the country. As of July 1st, VAT and service tax on home loans have been subsumed into one unified tax. With GST significantly higher at 18%, home loans may get more expensive for borrowers as banks and financial companies are likely to increase interest rates.
Impact on cost
Several taxes and duties such as customs duty, Central Sales Tax, excise duty, entry tax, etc. are borne by a developer while constructing a real estate project. These costs are factored into the final cost of the house and passed on to the buyer. As GST proposes to subsume multiple taxes into one, the input cost is likely to come down. This is expected to bring more liquidity into the market and boost home sales.
Another important factor to consider is the stage of construction. If the project is at an advanced stage, the majority of the cost has already been incurred before the application of the GST. In this case, very little ITC will be available, and less benefit will be passed on to the home buyer. On the other hand, if the project is at an early stage, the developer can avail more cost benefits.
Stamp duty and property tax
GST has subsumed more than 16 major taxes and levies into a single consolidated tax. But state levies such as stamp duty, registration charges, and property tax, which is a municipal levy, are currently outside the ambit of GST. The government plans to eventually subsume these levies into GST but hasn’t decided on a time frame for this step.
So far, GST has been a mixed bag for homebuyers.
Even as under-construction properties are likely to get cheaper, higher construction costs may cancel out the cost benefits. In the long run, bringing real estate under the GST ambit will benefit the consumers who will only have to pay one final tax on the whole product. However, there is still no clarity on issues like the abatement available for land cost to calculate service tax on under-construction projects.
The abatement rules will determine if the effective tax incidence on real estate is lower or higher under GST. These issues and grey areas need to be clarified before GST becomes a reality in real estate and its benefits are enjoyed by home buyers.