How will GST rates impact real estate services?

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GST

Effective July 1, 2017, the new tax reform- Goods and Service Tax (GST) - is likely to have a profound bearing on Indian real estate. 99acres.com shares a list of real estate services which are witnessing alterations, courtesy GST. 

While the Central government has not talked about the direct inclusion of the real estate sector under the ambit of revolutionary tax structure- GST, several other allied industries have been brought in the realm of the Act. Experts speculate this resulting into a significant impact on the realty prices, demand and eventually sales.

The segregation of taxes under four tax slabs of five percent, 12 percent, 18 percent and 28 percent is anticipated to make branded clothes, hotels, restaurants, and cars cheaper. However, it might put an inflationary pressure on housing rent, home maintenance cost, home loan, and metals and construction industry.

99acres.com shares a list of services conjectured to witness price increase come July 1, 2017:

Rental cost

With the new GST becoming effective in a month, property rentals are estimated to go up. According to the new provisions, any lease or letting out of a residential, commercial or industrial building, either partly or wholly, will be considered as a supply of services. This would eventually taxed under GST.

As proposed, while developers can avail the Input Credit Tax (ICT) with respect to the sale of under-construction flats. However, the facility stands annulled if the developer opts to rent out the property. Hence, commercial rentals might see an uptrend. Similarly, housing rents will  witness an upswing. Till now, residential property, used for rental accommodation, was not taxed, however, GST will imply a tax on the rent payment of a house, adding up to the burden on the tenant community.

Maintenance cost

Hiked maintenance cost is another way end-consumers might feel a dent on their pocket. Home or flat owners who spend Rs 5000 or more on their property maintenance have to bear an additional tax of 2.5 percent on the maintenance charges. Under the amended tax norms of GST, the current rate of 15.55 percent will now increase to 18 percent. The new rate is also valid on housing societies that have a yearly amount or balance of more than Rs 20 lakh. However, the tax calculated excludes property tax, stamp duty, electricity and water charges, and also maintenance charges gathered from apartment owners as the tax paid on these elements continue to remain so.

According to Niranjan Hiranandani, “The recent announcement made by the Central government excludes a high percentage of taxes on stamp duty, taxes, and other duties. This may lead to inflationary pressure on the real estate market.”

Construction cost

Currently pegged at 24-25 percent, prices of cement, an important ingredient of the construction industry will soar up as now all cement transactions will be taxed at 28 percent. An increase in cement cost would burden the developers and eventually homeowners planning for a home renovation.

Besides, with the inclusion of ‘works contract’ under the 12 percent tax slab, GST translates into extra expenditure for the developer in the short-term. As inputs tax credit can be availed only after the initial rounds of payments being made by the builder, many small developers will have to keep aside a higher amount initially to bear the increased cost of the project construction. Additionally, no clarity has been provided on the time limit within which input tax credit will be offered to the developers, reflecting the risk factor involved in the process proposed by the government.

Home loans

Financial services will become marginally dearer. Taxes on services such as loan processing fee will now be taxed under 18 percent slab than the previous 15 percent. Therefore, home buying can be a slightly costly affair for prospective stakeholders from July 1, 2017. Other services that will be taxed under the new tax rate include banking services, Automated Teller Machine (ATM) transactions and fund transfer.

 


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