GST and Infra Sector including Real Estate: By CA Rashmi Jain

GST and Infra Sector including Real Estate

Since completed homes will not be impacted 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. GST is also going to be applicable to the materials that a builder would buy for the construction of a housing project so it will have a certain impact on the costing of projects but much depends on what rate of GST will finally be confirmed.

For the SEZ players, since the GST regime is silent on zero-rating of supplies of goods and services to SEZ developers and units, the SEZ scheme may not appear beneficial anymore.

For the Infrastructure sector, it appears that there could be an overall increase in costs under the GST regime. For the thermal and renewable power industry, the key concern is that with power expected to be outside GST, this could lead to increase in setting up and operational costs, with no input credit and the exemptions on procurements/equipment being removed, this, in turn, could result in increased power tariff affecting industries that rely on the purchase of power

The duality of tax authorities at the state and central levels is not a happy situation. If the states continue to levy stamp duty, other local taxes like labor cess and municipal taxes then it will add burden to home-buyers’ cost.

For commercial property, GST will reduce taxation as developers will be able to get input credit of GST paid for construction services against the GST charged on lease rentals.

The bill treats construction activities as “work contracts” but is silent about guidelines on the valuation of land and has kept the sector away from the input tax credit. This could mean higher costs for the end consumer. Also, implementation of the bill will not subsume the stamp duty levied by the states, who may increase it from time to time to meet revenue targets thereby pushing costs higher for the buyer.

At present real estate sector faces:

Service Tax – If you are purchasing an under-construction property, the developer will have to charge you service tax and deposit it with the central government. This tax was not applicable till 1st July 2010.

In the finance act 2010, the government added an explanation to the definition of construction of residential complex and made it deemed service. For the simplicity, sake government has given abatement of ¾th of the cost of the unit as land and goods for construction and the only ¼th of the cost of unit is treated as service. Hence presently most homebuyers are paying 3.75% of the cost of the unit as service tax (1/4th of 15%).

VAT (Value Added Tax) – If you are purchasing an under-construction property, you will have to pay additional VAT in some states such as Karnataka, Haryana, and Maharashtra. Developers charge this value-added tax and deposit it with the state government.

Stamp Duty – Stamp duty is charged by the state government, again at varying rates, for registration of sale agreement for real estate transactions.

Incidentally, if you are buying a ready to move-in property directly from the developer after he has obtained a completion certificate from the authority, you don’t need to pay service tax and VAT hence saving 3.75% to 9% of property cost depending on the state where you are buying property.

Service Tax and VAT will be replaced by Central GST and State GST whereas stamp duty stays unchanged as it is out of the purview of GST.

There are two open items because of which at present it is difficult to predict accurately the impact of GST on real estate transactions. One is the GST rate and the second is abatement for land value in total agreement value of the under-construction residential unit. It will change the scenario for the players and the above calculation in the pre-GST regime may change p[ositively or negatively.  Let us then wait for the Valuation Rules for this sector, if at all these are framed by the CG or by the SGs.

GST could bring in transparency in the real estate sector, possibly reduce the cost of homeownership, especially if the GST rate is lower than current rates put together. It could also lead to lower compliance costs and input costs for builders.

GST – MY TAKE says

But builders and consultants are concerned about a clause in the GST bill which says input tax credit shall not be available in respect of the “goods and/or services acquired by the principal in the execution of works contract when such contract results in the construction of an immovable property, other than plant and machinery.”  This clause is interpretative which may lead to litigation and result in denial of credits in certain situations

From a consumer perspective, it is premature to say if GST will bring down property prices. We will have to wait for finer details especially with respect to the applicable rate for the real estate sector.