No Additional Burden On Homebuyers Under GST, Landlords Stay Exempt
The benefits of investing in under-construction properties will outweigh the benefits of investing in ready-to-move-in homes under the new Goods and Services Tax (GST) regime. The actual GST rate on under-construction properties is 18 per cent. However, the effective tax on such properties would be 12 per cent as under the new regime developers will be allowed input tax credits.
Landlords, too, have nothing to worry about GST on rent. Those who are earning a rental income by letting out their properties for residential use will not be taxed under the GST. However, those who have given their premises on rent to be used for commercial or industrial purposes will have to pay an 18 per cent tax in case they are earning over Rs 20 lakh annually.
"Rental income received from residential house is exempt. But, if you have given your unit to commercial enterprise, it is taxable if you are getting more than Rs 20 lakh as rent," said Revenue Secretary Hasmukh Adhia.
Will ready-to-move-in homes cost more?
The option of getting full input set-off credit that developers enjoy on under-construction projects would not be applicable on ready-to-move-in flats. This could effectively mean higher costs for homebuyers of ready-to-move-in flats, say developers.
"While developers might still get some benefits for projects that are in nascent stages, they will have to bear the tax burden for the ready-to-move-in projects since they are kept out of the GST ambit," PTI quoted Hiranandani Group Chairman and Managing Director Surendra Hiranandani as saying.
Meanwhile, the government has told developers to pass on any benefits that they may avail under the new tax regime to the homebuyers. "The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/installments ... It is advised to all builders/construction companies that in the flats under construction, they should not ask customers to pay a higher tax rate on installments to be received after imposition of GST,” a government statement said.
Here is the complete list of GST rates.
GST in India
The Rajya Sabha had on August 3 and the Lok Sabha on August 8 unanimously approved the Bill to enable the rollout of GST, arguably the biggest tax reform in India in recent times. The approvals have paved the way for implementing the indirect tax regime within the Union government's revised deadline of April 1, 2017.
The Goods and Services Tax (GST) Council on November 3 set the rates for the new tax regime. These rates would range from 5 to 28 percent, with 12 percent and 18 percent as standard rates. While things of mass consumption would be taxed at the rate of five per cent, luxury would be taxed at 28 percent.
Finance Minister Arun Jaitley had on August 3 tabled the Goods & Services Tax (GST) Constitutional Amendment Bill in the Rajya Sabha, and initiated a five-hour debate on the landmark tax reform. The proposed indirect tax regime, which is likely to subsume 17 indirect taxes upon implementation, will remove the disparity in the taxation structure across the country and bring one uniform tax rate.
How will GST impact real estate?
The real estate sector is estimated to account for about five per cent of India’s gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from 2015.
However, the sector faces issues in terms of macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multiple indirect tax levies, such as VAT, service tax, excise, stamp duty and registration fees.
With the launch of GST 'how it works' might already be on your mind. Since the GST is to subsume multiple indirect taxes, it will simplify tax compliance and minimise the scope for double taxation. So, there is clear reason for home buyers to cheer, even if they have to pay slightly more in case the standard GST rate is high.
On how GST will impact the real estate sector, Ankur Dhawan, Chief Business Officer (Resale), PropTiger.com, says: "GST itself is expected to add about two per cent to India's gross domestic product (GDP). That is a substantial boost to the economy. If the economy does well, obviously, there will be more demand for real estate, and it will be a boost for the sector."
Why a slightly higher GST rate might be acceptable to buyers
Since buyers are not liable to pay any indirect tax for the purchase of ready-to-move-in properties, the impact of GST on buyers of resale properties is likely to be very little. In the case of under-construction property transactions, buyers have to pay value-added tax (VAT) and service tax. While VAT is a state levy and its rate differs from one state to another, service tax is a central tax charged at 15 per cent. Overall, the current taxes on home purchase are not low and involve mind-boggling complexities.
Most buyers of under-construction properties take home loans to fund their purchase and the whole mathematics involved in the home loan process is quite baffling, too. In most cases, buyers do not carry out a detailed study of the various taxes that they have to additionally pay and they make their investment plans based only on the value of the property.
Also Read- GST: What's In Store For Real Estate Sector
In the case of VAT, for example, there is little clarity on what amount is paid at which level, and what part of it is passed on by the developer to the buyer. Often, for want of more clarity on the VAT rate in his state – if at all the state is imposing VAT on real estate – a buyer has to rely on the clauses mentioned in his sale agreement with the developer.
Unfortunately, no amount of research helps the buyer know the right rate? Lengthy government documents are mostly interpretative in nature and if you are not a professional chartered accountant, you might get lost in the study, and yet get a little success. On the other hand, if there is a clear uniform rate for one tax that includes everything that they need to pay in taxes to authorities, the whole payment process would become very convenient for the buyer. In such a case, even a higher rate would be more acceptable to him than a lack of clarity.
Why will developers love GST?
Since the GST is actually expected to bring down the project cost for developers, this would mean homes would, in fact, become cheaper.
There are many taxes and duties that a developer pays on the procurement side, such as Customs duty, Central Sales Tax, excise duty, entry tax, etc. These are subsequently passed on to the final pricing of the units and, thereby, to the buyer. As GST proposes to roll multiple taxes into one, the cost of construction will come down. This will bring more liquidity into the market and boost home sales. Free flow of credit for developers will also translate into an increase in margin in their hands.
"There are a lot of products developers procure for construction of their projects on which there is double taxation at present. The cost they bear for these come to 20 to 25 per cent of the cost of materials they are buying. So, with the GST rate, between 12 and 18 per cent, it will reduce the cost of production for developers. This will be good for buyers, as developers will be able to pass a part of the benefit to them," Dhawan adds.
For developers, the actual tax effect will be lower than the existing one mainly due to the input tax credit on raw materials that builders get against payment of taxes on inputs like steel and cement.
Moreover, the increase in tax is very less for major inputs. The indirect taxes on steel were around 17 per cent and that has now come to 18 per cent under GST, similarly for cement the taxes totalled to nearly 24 per cent which now has been standardised at 28 per cent. The GST rate for work contracts has also been fixed at 12 per cent.
"There is no doubt that GST will be a game-changer for Indian industry, including for the real estate sector, since it will subsume more than 16 major taxes and levies into a single consolidated tax. Additionally, the unified tax regime will stop the unwanted practice of double taxation, which hurt real estate and other sectors, given their cascading effect that inflated prices for end users. Though unorganised players are wary of GST’s impact, it will create a level playing field for organised entities; the former will now come within the tax ambit. With GST enforcing transparent transactions across all domains, this will be a blessing in disguise for real estate developers, too," says Aman Agarwal, director, KV Developers, and a member of the Naredco governing council.
Through market mechanism, GST will impart more transparency to the sector, which faces a perception issue. GST would provide an audit trail for better control and monitoring of the sector.
Updated on March 7, 2017:
The government has clarified that property prices would not shoot up under the Goods and Services Tax (GST) regime. Addressing a two-day CREDAI conclave in New Delhi recently, Urban Development Minister M Venkaiah Naidu said property prices, especially of affordable housing, would not increase under the new tax regime."We have already exempted affordable housing from service tax, and my ministry is addressing the need to continue this exemption under the GST. We have recommended to the Ministry of Finance to tax the sector at a rate which is revenue neutral and not at a higher tax rate,” Naidu said.
Updated on January 17, 2017:
The Centre and states have decided on sharing of powers for control over taxpayers under the Good and Services Tax (GST) regime. Under the consensus reached at the ninth meeting of the GST Council, states will be assessing and administering 90 per cent of the taxpayers falling under the Rs 1.5-crore annual turnover; the remaining would be controlled by the Centre. On the other hand, taxpayers with more than Rs 1.5 crore turnover will be administered by the Centre and states in a 50:50 ratio.
However, the new tax regime will now be rolled out from July 1. According to earlier plans, the Centre had to roll out the GST regime from April 1.
Update as on October 19:
In its third meeting on October 17, the Goods and Services Tax (GST) Council has proposed a four-tier structure for the new tax regime. The proposed regime will have a lower rate of six per cent, two standard rates of 12 per cent and 18 per cent, a higher rate of 26 per cent, and an additional cess on luxury and "demerit" products.
According to media reports, while the higher rate for services under the indirect tax regime is proposed to be 18 per cent, essential services could be taxed at six
per cent or 12 per cent. Around 70 per cent of the taxable base is proposed to be taxed at either 18 per cent, 12 per cent or six per cent, with more than 50 per cent
of the items to be taxed at 12 per cent or 18 per cent," says a report by The Indian Express.
Update as on September 27:
The draft Goods & Services Tax (GST) rules were on September 27 put up for discussion ahead of a meeting of the Centre and states on September 30 to discuss the GST regulations. The finance ministry has reportedly sought a feedback on the draft rules, which are related to registration, invoicing, procedures and guidelines, by September 28.
“The draft rules for registration, payments, invoice, etc, for GST are uploaded on CBEC website. Business community may view them and give quick comments, if any, by 28th night on email@example.com. We intend to have these rules approved by GST council in its meeting on 30th September. So that business systems can be modified by all," said Revenue secretary Hasmukh Adhia in a series of posts on microblogging site Twitter.
1/3 The draft rules for registration, payments, invoice, etc for GST are uploaded on CBEC website.
— Dr Hasmukh Adhia (@adhia03) September 26, 2016
2/3 Business community may view them and give quick comments, if any, by 28th night on firstname.lastname@example.org
— Dr Hasmukh Adhia (@adhia03) September 26, 2016
3/3 We intend to have these rules approved by GST council in its meeting on 30th September. So that business systems can be modified by all.
— Dr Hasmukh Adhia (@adhia03) September 26, 2016
Earlier, the Constitution Bill for the introduction of the Goods and Services Tax (GST) in India, which was approved by President Pranab Mukherjee on September 8, had been notified as the Constitution (101st Amendment) Act, 2016, on September 10. According to Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A from September 12.
According to Article 279A of the amended Constitution, the GST Council will be a joint forum of the Centre and states and shall consist of the following members:
- Chairperson: Union finance minister
- Member: The Union Minister of State for finance (in charge of revenue)
- Members: The ministers in charge of finance or taxation or any other minister nominated by each state government
The Council will make recommendations to the Union and states governments on important issues related to GST, such as the goods and services that might be subjected or exempted from GST, model GST laws, principles that govern place of supply, threshold limits, GST rates, including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc.
(With inputs from Srinibas Rout)