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How has GST Impacted The Real Estate Sector in India

How has GST Impacted The Real Estate Sector in India

How has GST impacted the real estate sector in India

Real estate sector in India has always witnessed a topsy turvy path when it comes to builders, buyers or government. Where one side buyers have mostly been jittery investing in ‘soon to be launched’ projects, builders have tried their best to woo their targeted audience by implementing flamboyant marketing strategies. Amid all this business, government bodies have always maintained their firm grip on the real estate ecosystem by executing various mandate rules and policies. One such implementation came to light when GST (Goods and Service Tax) was rolled out by the government on July 1, 2017. Sectors including retail, FMCG, healthcare and even real estate came under the GST web. This move by the government was booed by few, but appreciated by many. There was no doubt that the move was an effort to transform India with its ‘One nation, one market, on tax’ principle.

Introduction

Real estate is one of the key sectors of the Indian economy. In fact it is the largest employer in the economy after agriculture, contributing an average of 5-6 percent to the GDP, a contribution that is predicted to grow at a compounded annual growth rate (CAGR) of 30 percent over the next 10 years. According to statistics, real estate sector will be worth an astounding $180 billion in revenue by 2020. If we look at the past, the real estate industry was entangled in dispute due to vagueness in provisions as well as multiple taxations. Of that matter, GST is predicted to simplify taxation compliance and have a positive impact on the industry as a whole.

Now let’s see how GST impacted various parties involved in the real estate sector:

Impact of Investors and Real Estate Buyers

Under the earlier stated law, buyers were supposed to pay taxes depending on the construction status of the property i.e, whether the property was under construction or complete. When a buyer use to purchase a property, he/she was subjected to pay VAT, service tax, stamp duty and registration charges. Properties bought after completion were exempted from VAT, and service tax, and only stamp duty and registration charges were payable. Moreover, the state where the property was located was taken under consideration because VAT, stamp duty and registration charges varied from state to state. As per a straightforward understanding, GST is a simple tax that applies on the overall purchase price. All properties under construction will be charged at 12 percent of the property value. This surely excludes stamp duty and registration charges. For completed properties, the earlier provisions will continue and buyers will not be paying any indirect tax on sale of ready-to-move in properties.

Impact on Developers

In the past, developers were accountable to pay central exercise duty, VAT, custom duty, entry taxes etc on construction material cost. They were also supposed to pay 15% tax on services like architect fees, approval charges, labour, legal charges etc. Eventually this tax burden was transferred to the buyer. However, according to the new regime, the charges in the construction costs are not as difficult. As an example, we can say that cement will now be taxed at the rate of 28% under GST. However, this is higher than the current average tax rate, which is approximately 23-24 percent, but many additional taxes charged over the average rate will now be included within GST guidelines.

Other than this, the decreased cost of logistics will give way to reduction of expenses as well. The input tax credit will also assist in increasing profit margins. A developer will be enabled to take input credits on the sale of property under construction against the taxes that are paid by the buyer. All this is surely expected to bring down the cost of the project for the developers and further developers will have to hand on the benefits of the price reduction to the buyer. Prior to GST, a mammoth percentage of real estate project expenditure went unrecorded. GST will for sure cut down this percentage by cloud storage of invoicing. On the other hand, the real estate sector will also benefit with the new tax law, having a positive effect on all subsidiary industries since this sector has a kindling demand for more than 250 supplementary industries.

Urgent Need of Automation

Taking the new compliance challenges into account for the real estate industry under GST, businesses will need to bring appropriate changes to their IT systems in order to be GST compliance ready. Moreover, the Real Estate (Regulation & Development) Act 2016 will steer an altogether new need for automation.

Automation will also provide a huge pool of benefits, including timely compliance, comparison of reports, report generation, decision making, cost effectiveness with reduced staff and more.

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