by Akhilesh K Prasad
The Goods and Services Tax (GST) was passed by the government on the 29th of March, 2017. The aim of implementing the new tax regime was to curb the effects of the previous multiple taxation systems such as VAT, Service Tax and so on. It was also introduced to provide a much-needed boost to the GDP. GST has a 4-tier taxation structure; tax slabs of 5%, 12%, 18% and 28% for different goods and services.
The real estate sector is a significant contributor to India’s GDP. It is the country’s second largest sector in terms of the number of people employed. The contribution of this sector will probably grow further at a Compound Annual Growth Rate (CAGR) of about 30% in the next 10 years and have revenues to the tune of $180 billion by 2020.
A year after the implementation of the new tax regime, it is pertinent to analyse its impact on the sector from various perspectives, more so because industry insiders are apparently divided in their opinion on the matter.
Impact of GST on the incidence of the tax
There were different tax slabs for under construction properties and ready properties, in the previous tax regime. States had different rates for VAT and other duties that resulted in a disparity in the incidence of taxes, which affected property prices. The current taxation system in the real estate industry is based on the tenet of ‘One nation, one tax,’ and has largely done away with such tax disparities.
Previously, various taxes were paid by the allied industries and on the final outcome. The burden of all such taxes was eventually borne by the investor. Thereafter, the final market price was arrived at. Under the GST regime, the pressure of tax rates on investors has eased to a great extent.
Developers were responsible to pay several varieties of tax. This included customs duty, entry tax, central excise etc on the material cost of construction. They were also required to pay an additional 15% tax on account of labour charges, architectural design and approval costs. The simplification of taxation brought about by the implementation of GST has introduced input tax credits that have consequently increased the margin of profit. It is expected that developers will pass on the benefits to buyers.
The total burden of tax on buyers under the old system was 5.5%. The new tax regime has significantly increased this to 12%. However, this may not reflect on the price of properties as the taxes on inputs and materials have been simplified and developers are expected to pass on the benefits to buyers.
On affordable and luxury segments
The government released a statement in February 2017 to the effect that no GST would be charged to buyers. It was said that the GST applicable to affordable housing, which stands at 8%, can be adjusted within input costs. In case the buyer gets the apartment at lower than market price, then it will be mandatory to pay 8% GST. The policy, however, came under criticism from various quarters for lack of clarity. It was said that the government should specifically define what projects come under the purview of the affordable segment in order to avoid ambiguity.
Conversely, the basic cost of construction is generally lower than other cases in the luxury segment, but the tax rate is as high as 12%.
We need to wait for a couple of years to gauge the effective impact of GST on real estate, given that the system is still settling down with the knee-jerk change. But as of now, there can be no denying that the simpler tax format is looking promising.
An MBA by qualification, Akhilesh has dabbled into various businesses. He is a keen debater, data miner and analytically inclined. His blogs tend to present a fresh perspective on any given matter