How will 12% GST on under-construction properties impact real estate?

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GST Bill

With the inclusion of works contracts under the 12 percent slab of GST, under-construction properties have come under the ambit of the revolutionary tax regime. 99acres.com analyses what this means for the Indian real estate sector.

The Goods and Services Tax (GST) Council has included works contracts between realty developers and service providers under the 12 percent slab. This move has brought under-construction properties under the GST regime while ready-to-move properties still remain out of the new tax system’s ambit.

Currently, a works contract bears six percent service tax and one to five percent Value Added Tax (VAT) varying from one state to another. In all, the real estate sector attracts indirect levies in the range of 9-11 percent, comprising excise duty, service, tax, and VAT, to name a few. Further, there is limited facility of input tax credit for developers which means that developers cannot set off taxes paid on input materials against indirect taxes collected from buyers. These restricting provisions contribute to the high prices of real estate in the country.

Good news for stakeholders

Come July 1, the GST regime will subsume major indirect taxes into a single rate, 12 percent in case of under-construction properties, and will also put an end to dual taxation. Sachin Menon, National Head, Indirect Tax, KPMG explains that, currently, both service tax and VAT is levied on 110 percent of the contract value. While 15 percent is levied as service charge on 40 percent of the contract value, VAT/excise duty of about 18 percent is charged on 70 percent of the contract value. Levying GST on works contracts at 12 percent will reduce the cost of real estate in the hands of the buyer and will give a much needed fillip to the sector.

The removal of obstacles in the path of full credit utilisation by developers will also help lower the actual incidence of GST. This will help in strengthening the credit chain in the real estate sector, comments Pakshal Sanghvi, Director, Sanghvi Realty.

How will this impact property prices?

Allaying homebuyers’ concern about any drastic rise in property prices due to tax regime change, industry experts state that buyers of under-construction properties are unlikely to be burdened with additional tax burden on account of GST rollout.

Industry experts explain that that the final impact of the revolutionary tax reform on property prices will vary from one state to another. Since VAT is a state levy, the exact effect of its replacement with GST will differ across the country. For instance, in a state where the current indirect tax levies are lower than proposed rate of 12 percent, property prices could still turn out to be cheaper under GST if the benefit of input tax credit outweighs the increase in the tax rate.

Amit Wadhwani, Director, Sai Estate Consultants, adds that the possibility of lower construction costs on account of input credit could lower property prices if developers pass on the benefits to end users. This will be further supported by the anti-profiteering clause which urges developers to share the benefits derived from GST with the buyers via proportionate reduction in prices. Thus, the general agreement in the industry is that the new tax structure will not cause any undue spike in ticket sizes of under-construction properties. 


Copyright 99acres.com


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  • Comments
  • sumit Joshi June 21, 20175:43 pm

    Agreement is executed then when effect of GST Act will be retrospective ? Only loan amount is to be disbursed, now whether I have to pay extra service tax as per GSt?

    Reply
    1. Farozan Akhtar

      Farozan Akhtar June 22, 201712:15 pm

      Dear Sumit,
      It would be better if you enquired about any possible retrospective effect of GST from an expert. You may post the query at 99acres’ Ask and Answer forum at 99acres.com/ask.

      Reply
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