Effect of GST on under-construction properties

Effect of GST on under-construction properties
Effect of GST on under-construction properties

Our country seems to have been grappled over by yet another economic reform promised by the present Indian Modi Government. The magical word is ‘GST’ and everybody seems to have an opinion about it – Some seem to look at it positively and some negatively. With the aim and all its focus on ‘cleansing’ the system, Indian Government has made a historical move towards unifying the tax system on India that was believed (till now) to be one of the most complex financial arrangements in the world. Right from the raw material to the plethora of finished goods, the GST effect is taking the business world of India by storm and real estate is equally affected, more so with impeding clarity on this particular segment which is India’s second largest employer. Along with Benami Act Amendment, Demonetization and RERA, with GST it is seen as another primer on which the foundation of clean and crystal clear real estate sector will be laid upon; at least the makers of the policies think so. GST on under-construction properties is set to further intrigue Real Estate stakeholders, with a proper clarification on a lot of issues surrounding the real estate and ancillary industries.

Hence, it is time to make a clear and crisp table of effects of GST and find out how impact of GST on property prices are going to change the game for developers and homebuyers. HousingMan brings you a detailed analysis of GST and its functional role in the betterment of Indian economy on the whole and real estate in particular. The most important announcement made for Real Estate is that the works contract will carry tax liability at the rate of 18% GST coupled with full input tax credit. Since most of the contracts are of works contract nature in the real estate sector, therefore it may seem a bit on the higher side when taken a vague look.

The following classification can help understand the effect of GST on Real Estate better.

  1. Service tax that construction companies need to pay: ~6%
  2. VAT payable across states: 1-15% depending upon the state laws
  3. Tax on infrastructure development projects (dams, roads etc): Nil

So, the works contract that are actually an overlap of goods and construction services will be charged with somewhere around 15% tax that is actually less than the present tax bracket of 18%. It must sound good to the homebuyers, as the builders may choose to transfer the benefit of less tax to them in the shape of lowered property prices.

Impact of GST on homebuyers

GST is not going to alter the sales proposition of completed constructions and layouts. There is no change proposed in stamp duty value and in charges applicable on registration. Thus, the impact of GST on homebuyers looking for a constructed property is going to be nil. However, the builders who construct properties to put on sale will require paying GST at 12%. At this rate, both the land value and the construction cost are taken into consideration. But, those deals that demarcate the land value and cost of construction separately will attract the GST rate of 18%.

One of the factors that are expected to bring down the property value for the homebuyers is availability of full input tax credit. With the commencement of RERA ACT,  the projects are expected to be completed on time as per RERA guidelines making it possible for the builders to bring down their cost.

With the availability of full ITC for completing the projects in real small time, it has become essential for the builders to justify the prices; apparently with the GST on under-construction properties; it would lead them to making offers, discounts and other benefits while proposing the sales deal. So, the best days are waiting to arrive, creating good impact on the buying sentiment and giving much needed impetus to an otherwise stagnant real estate sector.

However, the impact of GST on homebuyers will not be uniform throughout the country. As the state tax structure is not the same at all places, the homebuyers would find some difference in the margins with GST being applied. As each Real estate law – RERA differs from state to state.

Instances where GST would add to the property rates

GST is going to impact the price of construction material. Steel and cement – two of the most used raw materials in the Real Estate industry – are going to see substantial rise in price due to 18% GST. This will push up the property prices, as the builders would require to revise the price slab to meet the profit margins.

Another front that is being corrected is the minimum wage slab of the construction workers. Increase in the labor wages is going to create extra cost premise for the builders and so, this would also add to the reasons behind property price hike in the coming times. The brighter side of the situation is the consolidation of all types of taxes, applicable at both Center and State, into single system. This practice is actually subsuming double impact tax, thereby, pegging the final tax applicable at 12%. Pundits believe this scenario to be a positive sign for the industry. A particularly keen benefit for home-buyers is no additional taxes or hidden costs in the final payment while investing in real estate.

Effect of GST on under-construction properties
Effect of GST on under-construction properties

Under-construction property sector is going to witness exceptional rise with increased  foreign investment and also in coming of more professional realtors into the picture. A smooth, uniform and a single window tax system is going to make things transparent, easily comprehensible as well as fully supportive of more funds flowing into the system. Improvement in the investment scenario and availability of institutional credits at easier rates in addition to RERA is likely to bring more funds, making it easier for the builders to pass on the price benefits as also specifically directed by the present government, and on not following the same certain precautionary measures under the pursuit of GST Law will be applicable – The anti-profiteering law which will lead the builder to refund the entire amount if found guilty. With the GST on under-construction properties, it is set to bring in a considerable relief to home-buyers. The increase in confidence in NRI customers is expected to bring positive impact on the real estate sector making it a dream investment avenue for any investor.

However, the effect of GST on under-construction properties under real estate is yet to be observed in the form of actions. One of the most convenient things to happen is seamless movement in the allied industries, such as in the cargo of construction material from one state to another. Reduction in paperwork, good governance and easy understanding of tax liability would surely add to the momentum in the sector, making quality residential projects available for possession in record time.

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