Impact of GST on commercial real estate

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The Goods and Service Tax (GST) Act, set to be implemented on July 1, 2017, will be a game changer for India’s real estate market. The radical tax norm will not only impact the residential landscape, but also the commercial realty transactions.

The introduction of Goods and Services Tax (GST) would be a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax, it would mitigate cascading or double taxation in a major way and pave the way for a common national market. Introduction of GST would also make Indian products competitive in the domestic and international markets. Studies show that this would have a boosting impact on economic growth. Last but not the least, this tax, because of its transparent and self-policing character, would be easier to administer.

Impact on real estate sector

With the implementation of GST from July 1, leasing of land, renting of buildings as well as EMIs paid for purchase of under-construction houses will start attracting the Goods and Services Tax.

GST, will subsume central excise, service tax and state VAT among other indirect levies on manufactured goods and services.

The Central GST (CGST) bill - one of the four legislations introduced, states that any lease, tenancy, easement, licence to occupy land will be considered as supply of service. Also, any lease or letting out of the building, including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services as per the CGST bill.

Tax experts said that currently service tax is levied on rents paid for commercial and industrial units, although it is exempt for residential units.

While GST subsumes many taxes, it does not exempt electricity duty. it will continue to be levied by the respective state governments. Certain states like Delhi exempt residential properties from electricity duty but levy it on commercial and industrial units.

Impact on Developers

Tax is now 12 percent with full input tax credit available to developers on construction materials. The final bill is likely to be the same or marginally higher, varying across states as clarity on abatement rules has still not been provided. Some change in terms of changing market dynamics has already brought about a change in developers' workings. A similar change in plans to be more customer-centric and delivery-focused to create a differentiated identity will be the most likely method developers will adopt while they will factor in the input tax credit which will reduce their construction costs and such benefits will be passed on to the buyers.

Under-construction real estate for sale purposes will attract GST at 12 percent. This os likely to be tax-neutral to slightly negative depending upon states' prevalent service tax and VAT rules. For commercial leases, the GST does not talk expressly about this service and hence, it is covered under 18 percent tax rate with full input tax credit and this should turn out to be neutral for this sector. 

Under the extant indirect tax regime, work contracts usually cover three types of taxable activities: Supply of goods (inputs), services and manufacturing. While the supply of goods attracts value-added tax (VAT), the service tax is imposed on services. If a new item is produced in the process of completing a works contract, the central excise duty is levied on that product. GST regime will bring in the much-needed simplification of the indirect tax structure, as work contracts will be treated only as service. Moreover, the ITC facility will reduce the cost of raw material procurement.

Raw materials cost less

The cost of some of the inputs for work contracts, including steel, will be lower under the new regime, as the government has proposed a GST rate of 5 percent for coal (which is used in making steel and some other products), much lower than the current effective tax incidence of 11.5 percent, said analysts. The GST regime will reduce the cash component of the construction economy, because, to avail of ITC, the raw materials have to be sourced from GST-registered vendors. This will lead to greater tax compliance.

Impact in terms of construction cost

One good thing that GST purports to do is that it will help cut cash component in construction, as inputs have to be sourced from registered vendors to get input tax credits. This step will decisively cut down on the black money component in real estate.

The GST returns process ensures that both suppliers and recipients of goods and/or services are liable to disclose transaction details w.r.t. value, amount, GST rate, etc. This will promote transparency in the ecosystem, and eligibility of credit will encourage participants to declare details, thereby, minimising scope for cash-driven transactions. SEZ projects should by and large be neutral after the introduction of GST from July.

Under the GST regime, special focus would be required on the taxability of landlord-developer transactions, especially on the taxation, valuation and timing for payment of taxes on such transactions and also on the liability of landlords for sale of their portion of constructed area before completion of construction.  

Overall, GST appears to be a benefactor for the real estate regime, primarily in light of the expected free flow of credit, which should translate into an increase in margin in the hands of the developer. Whether these benefits will percolate into the end customers/users is to be seen, more so because pricing in this sector is more driven by market forces than on costing principles. More importantly, as the GST regime is expected to impart greater transparency through market mechanism, it is imperative that real estate transactions forms an integral part of the proposed GST design.

Disclaimer: The views expressed in the article are solely of the author and may not represent 99acres.com's opinions on the subject. 99acres.com does not take responsibility for any actions taken based on the information shared by the author.


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  • Comments
  • Sunil Shah July 13, 201711:46 am

    I reside in Chandigarh and have commercial property in Punjab, that attract GST. Being in business, I already have GST number at Chandigarh. Can you please educate me as to how will I comply with the new law? Regards

    Reply
  • HARESH V DHOLARIA July 29, 201711:13 pm

    SIR I PURCHASED COMMERCIAL PROPERTY AT SURAT IN GUJARAT. I MADE BOOKING AT 25TH APRIL,2017 AND SATAKHAT MADE ON STAMP PAER OF RS.11 FOR SALE CONSIDERATION 8 LAKH FOR LOAN PURPOSE, LOAN HS SANCTIONED IN 16TH MAY, LOAN DISBURSED ON 29TH JUNE.. SALE DEED MADE ON 7TH JULY, ORIGINAL CHEQUE RECEIVED FROM BANK AND DEEPOSITED AT 20TH JULY.. IS THERE GST APPLICABLE OR NOT? AND IF GST APPLICABLE I HAVE ALREADY GST NUMBER .,CAN I TAKE CREDIT OF GST PAID TO BUILDER,, OTHER ISSUE BUC (BUILDING USE CERTIFICATE) IS NOT RECEIVED TO BUILDER TILL DATE… SOLVE PROBLEM

    Reply
  • Uthappa P B August 19, 20171:03 pm

    Can we set off the GST payable ( Subleasing property) towards GST input received from Varies sources.

    Kindly advise.

    Thanks,
    Regards,
    Uthappa P B

    Reply
  • O.P. Maheshwari August 27, 20175:51 pm

    I had booked a residential Unit with Builder A and paid 8 lacs plus servicetax 36000/- prior to June 2017. Project is not coming up.Hence I have been offered alternate Unit in new Project of his associate builder B whose cost is 15 lacs, and that ther payment made by me 8 Lacs and 36000/-will be transferred by A to B and the balance amount will have now to be paid by me to B. B is demanding GST on full amount of 15 Lacs and not the balance amount payable to him. Kindly guide whether this will be fresh transaction with B or it will be continuity of service from A to B as I have already paid service tax on the earlier payment.
    Reply

    Reply
    1. Farozan Akhtar

      Farozan Akhtar August 28, 20174:58 pm

      I would advise you to post your query on http://www.99acres.com/ask so that experts may answer it.

      Reply
  • anup September 28, 20177:37 pm

    Hi, I booked a shop in 2015 and paid 50% of the amount. Now the shop is ready for possession and now they have added CGST and SGST. IS this correct? because GST is started from this year only while its old project.
    Regards,
    Anup

    Reply
  • Deepak Gupta November 1, 20177:35 am

    I have a commercial property in Gurgaon that I want to lease / rent out. There is a GST on leasing agent’s services or brokerage as you may call it. Can I avail a credit or refund on the GST so paid on agent’s services?

    Reply
  • ketan patel November 7, 20176:58 pm

    I purchase shope in flat at ground flour.
    Its value is 350000 so u know me how many gst on this amount
    Who paid gst buyer or seller(builder)

    Reply
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