Goods and Services Tax (GST) came into effect in July 2017 and it has been a game-changer across all sectors of our economy, Real Estate being one of the larger sectors. Meant to do away with the multiple taxes like VAT, Service tax and others, it has indeed aided the process of building a more simplified and robust tax system.
Real estate is one of the most important sectors of the Indian economy and accounts for 6-8% of its GDP. With the implementation of GST, the country stands to witness some significant changes in this sector.
With major relaxations in some very competitive segments of the real estate market, like the rental markets, these segments saw a spike in investments while others remained relatively stable. The impact of GST on real estate has been phenomenal.
Real estate, which used to be taxed at the rate of 12% is now taxed at the rate of 5% and real estate giants believe that this compilation of taxes into a single unit has indeed helped boost the sector and accelerate growth.
Although taxes such as Stamp Duty and Registration charges, and those associated with construction materials remain separate, GST still helps to bring together a composite system of taxing with some lucrative perks in this sector. Thereby, boosting investments in this sector, particularly in the Rental Markets, especially in the case of properties rented for residential purposes.
The Impact of Changes in 2019 GST on Real Estate
In February of 2019, the new GST rates were introduced for residential properties and it came into effect in April 2019. The Council abolished the ITC benefits and offered a transition plan to the developers. The current GST rates prevalent in the real estate sector are:
- GST on under-construction properties – 5% without ITC benefits
- GST on affordable houses (within Rs. 45 lakh) – 1% without ITC benefits
- GST on commercial properties – 12% with ITC benefits
With the redefinition of affordable housing unit, properties were divided into three categories:
- Properties with the total carpet area not exceeding 60 sq m in metropolitan areas including Delhi NCR, Kolkata, Chennai, Hyderabad, Bangalore and Mumbai Metropolitan Region (MMR).
- Properties with the total carpet area not exceeding 90 sq m in non-metropolitan cities and towns.
- Properties priced within Rs 45 lakh in either metropolitan or non-metropolitan areas.
The Key Impacts of GST on Real Estate Market
- There was a steady increase in interest towards completed properties as compared to those in construction. As completed properties that possessed a certificate were completely exempted from tax while under-construction units were placed in the 5% tax segment.
- With the presence of other taxes associated with materials used for construction the cost of overall construction increased and hence, this segment saw fewer investments from buyers.
- Another aspect that affected the interest of buyers was the delays associated with under-construction units and the developers filing for insolvency.
- With the removal of ITC benefits and exemption of Stamp Duty and Registration charges, the overall price of property didn’t undergo a substantial change in terms of pricing.
- With the introduction of GST and its modifications, transparency and accountability in the real estate sector have increased.
- Affordable housing units or those under the economic segment became a more lucrative option with 1% GST on them.
- The Rental Market became the most benefited segment of the real estate sector. With the exemption of GST on residential properties that were rented for residential purposes and an 18% GST on maintenance charges exceeding Rs. 7500 per month per member, the Real Estate Rental Market gained considerable popularity.
- The tax liability on property owners eased further when the threshold limit for rental properties used for commercial purposes was increased from 10 lakhs to 20 lakhs.
- Despite all the positives, there are some points that still deter investments made in this sector. Like the cumbersome process of calculating GST and the confusion often associated with the process, the exemption of Stamp Duty and Registration charges that burden the buyer, the removal of ITC benefits and others.
- Reverse Charge Mechanism (RCM) is another aspect where the introduction of GST has affected people negatively. Under this, if a person registered under GST obtains goods or services from a person who isn’t registered under GST, then GST will be levied on the person receiving the goods or services for that transaction.
In case of goods and services, like legal services, services received from the government and others; that are received by the developer, he has to pay the GST for the same. The developer cannot adjust the tax payable with regard to RCM against the input credits of GST, instead, it has to be paid in cash or as bank payments.
The developers have thus, been adversely affected and there has been a considerable shift in the buyers to a ‘wait and watch’ stance instead of immediate investments in properties under construction.
As mentioned previously, it also led to an increase in interest towards completed properties rather than drawing investments towards those under-construction. The absence of transparency of ITC has been a considerable motivation in this regard. Small developers have been considerably burdened by the new changes and this has hampered the overall investments made in this sector.
Many think that the overall impact of GST has had an exceptional effect on this sector while some believe that the pros and cons have balanced each other out and that there has been no substantial change.
While the actual data that exemplifies the real-time impact of GST on real estate can only be accessed over time, one cannot deny that the new form of the composite taxing system has brought about some welcome changes to this sector that had been plagued by the archaic system of multiple taxing.