Published on: Aug 17, 2016 @ 20:52
The GST (Goods and Services Tax) Bill has finally got the Rajya Sabha and Lok Sabha approval after a long wait. The GST will replace various kinds of indirect taxes by a single tax regime across the country. It is all set to bring tax reform in India by providing greater relief from the complex tax system.
The Goods and Services Tax (GST) Bill is the biggest indirect tax reform undertaken by the Narendra Modi government, which will transform India into a single market. Once the GST Bill is rolled out, there will be a common tax structure in India. The GST would remove cascading taxes and thus the burden of paying multiple taxes will be over.
The GST will also infuse the much-needed transparency into our taxation system. The bill will bring in a more comprehensive and uniform tax structure in the economy. It will create further efficiencies in the economy and will help in terms of ease of doing business in India. We can hope for an efficient and transparent tax structure in India. This would definitely boost the ‘Make in India‘ initiative and create more employment.
The next step after the GST bill getting clearance from both the Upper and Lower Houses of parliament is to get ratification of this constitutional amendment by more than 50 percent states and then it will have to be cleared by both Central and State Governments. After a majority of states approve this bill, Parliament will need to pass another bill to implement it. Lastly, a GST council made up of central and state officials will decide the GST rates. The GST Bill is supposed to be implemented from April 1, 2017.
Impact Of GST On Builders
The GST can benefit the real estate industry by ensuring a uniform tax structure and thereby improving the tax compliance by the developers. This Bill would boost transparency and uniformity in the real estate sector and expected to cut construction cost to drive the demand.
GST is a long-awaited tax reform but its impact on real estate would be felt most on new constructions. This is because it will seek to merge various taxes on building materials into one. The real estate industry, which is currently facing issues of multiple taxes amounting to over 25 percent in indirect taxes. The central and state government levy different types of taxes for land, property etc. The GST rate is expected to be fixed at around 18 percent.
However, since GST will be applicable on the building materials that a builder buys for the construction of a housing project, hence, it will have a direct impact on the total costing of the project. At present, the developer pays various kinds of taxes during the construction phase of a project such as VAT (value-added tax)/CST, excise duty, and custom duty etc. which is then added to the cost of properties. GST, once implemented, will replace multiple taxes with a single tax, thus reducing the cost for all the players and thus increasing the demand in the sector.
The real estate sector works with more than 250 other industries such as Steel, Cement, BFSI, IT and so on. Under GST, the developers would see a lesser burden of tax on these input items as tax credits would be available for set off at various stages. This will cut construction costs for developers and then it can be passed as a reduction to buyers.
GST Impact On Homebuyers
Currently, a homebuyer pay both Service Tax of 4.5 % and VAT (value-added tax) while purchasing under construction properties. At present, the VAT is charged at 1% in some states and it varies from state to state.
Moreover, implementation of the bill will not subsume the stamp duty levied by the states. The first time stamp duty is paid on land, then the flat buyers pay it on the flat without any credit for the land payment. The buyer has to pay stamp duty on property transfer which will not be included in the GST bill. The stamp duty is imposed on 5% in some state, and it differs from state to state.
GST Impact On Real Estate Industry
Implementation of the GST law will have a positive impact on the real estate sector with expected reduction in its tax burden. Construction costs would be reduced to some extent and this benefit can be passed on to the customers, thereby driving home demand.
However, the real impact of GST on real estate remains to be seen, in terms of tax outflow for developers and consumers, till final rates are decided. If the GST rate is higher than the current cumulative taxes then it means that the overall cost of an under-construction flat will increase along with the added cost of stamp duty and registration.
If the rate is relatively lower than the existing cumulative taxes then the price of an under construction flat will decrease thus benefitting builders who would like to pass it on to the buyers.
With the improved economic environment, we are hopeful of a positive impact on real estate industry. The real estate industry contributes about 7.8% to India’s GDP and is the second-largest employment generator. According to some experts, GST can help increase GDP by 1-2% in the long run.
Since completed homes will not be affected by GST as a buyer already pays stamp duty to the government on the transaction so selling an under construction apartment and renting of properties are likely to come under the ambit of this tax.
The commercial real estate developers are now burdened with high input costs due to unavailability of credits on services used for construction of immovable property. For commercial property, GST will cut taxation as developers can now claim to get input credit of GST paid for construction services against the GST charged on lease rentals.
Further, there is still ambiguity whether Transfer of Development Rights (TDR) on land will be liable to service tax. GST will bring clarity and transparency in the functioning of the real estate sector.
The GST will bring clarity and transparency in the functioning of the real estate sector. The complete effects of this bill will take some time to be realized and get manifested. The time frame for rolling out the GST will take some time. Prior experiences suggest that there is a gap of about 1 year between introduction and implementation of GST. Overall, the GST will have a long-lasting and progressive impact on the economy, enhancing the prevalent business sentiment in the country. The burden on taxpayers will come down considerably.
It is a step towards greater progress and growth and would help in increasing the GDP growth of the country. The Real Estate Industry is optimistic that GST would indeed be an answer to the current indirect tax complexities and one can expect the sector to benefit in the long term.
Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.