Industry gurus across various sectors have been constantly mulling over the impact of the Goods and Services Tax (GST) on their respective sectors. With the implementation date getting closer, there are some common expectations that resonate clearly among various industry experts from this new tax regime.
There are many factors that need to be considered before understanding the impact of GST on property prices. Currently, the indirect taxes that affect the real estate sector range from the taxes paid by the real estate developers to the home buyers.
Under the current tax regime, the taxes are paid by the real estate developers include:
- Service tax [ST]
- Values added tax [VAT] and / or Central sales tax [CST]
- Excise duty
With the implementation of GST, all these taxes will no longer be applicable and the developers will have to pay only one tax – Goods and Services Tax [GST]. There is a new mechanism called ‘Input Credit’, which has been introduced along with GST. In simple words, input credit means that at the time of paying tax on output, you can deduct the tax that you have already paid on input. This mechanism can help drastically reduce the cash component in construction as inputs [raw materials, services, etc.] have to be sourced from registered vendors to avail input tax credits.
The current tax rate levied on various goods and service in the real estate sector in India lies between 6% to 10%. Under GST, the expected rate should be around 12%. Though it is higher than the current rate, the input credit facility could offset this additional tax burden.
Further, in the current tax regime, home buyers pay the following taxes when they purchase an under construction property:
- Service tax [ST]
- Value added tax [VAT]
- Stamp duty
While the service tax and value added tax components are subsumed under GST, Stamp Duty will continue as it is. The current indirect tax paid by the home buyer which includes excise duty, value-added tax and service tax is approximately 11 percent [stamp duty additional]. Under GST, since all current indirect taxes will be subsumed, the expected tax would be around 12 percent [stamp duty additional].
In view of the above, industry experts feel that the proposed GST rate will not impact property prices. According to National Real Estate Development Council (NAREDCO), an autonomous and self-regulatory body established under the aegis of Ministry of Housing and Urban Poverty Alleviation, “the actual tax incidence under GST would match or be lower than the existing multiple indirect taxes on the sector. The GST rate for work contracts, which will also be offset by input credits, will provide for a seamless and simplified tax policy.”
In addition, property prices will neither go up nor down, but it will be an easier mechanism due to the removal of multiple taxes and will be more transparent. The unified tax regime will stop the unwanted practice of double taxation, which hurt real estate and other sectors, given the cascading effect which inflated prices for end users.
GST should motivate the NRI community to invest in real estate in India. It needs the assistance of state governments to help ensure that there is transparency in dealings of land purchases.