The Goods and Services Tax (GST) is one of the largest indirect tax reforms in the country anticipated to not only simplify the complex tax structure but would also boost consumer demand in the prevailing timid realty market.
The GST will be effective beginning 1 st July 2017, and with any new reform, there are some areas where further clarity is required. As people start implementing the tax regime, there will be queries that need further clarification. It is natural for people and businesses to feel overwhelmed when implementing a new reform.
It has been slated that under construction properties or residential construction services, will be subject to a 12 percent GST rate for developers selling residential units prior to the completion of construction to home buyers. Stamp duty will be levied in addition to GST on these transactions. Currently, with the exception of stamp duty, buyers need to pay several indirect taxes such as excise duty, value-added tax and service tax.
In a recent financial analysis, it was estimated that the current real estate transaction taxes are:
15.2% for Bangalore = 4% VAT, 4.5% Service Tax, 5.7% Stamp Duty, 1% Registration
11.5% for Mumbai = 1% VAT, 4.5% Service Tax, 5% Stamp Duty (recently reduced), 1% Registration Charges
11.5% for Pune = 1% VAT, 4.5% Service Tax, 5% Stamp Duty, 1% Registration Charges
14.5% for Chennai = 2% VAT, 4.5% Service Tax, 7% Stamp Duty, 1% Registration Charges
15% for Gurgaon= 4% VAT, 4.5% Service Tax, 6% Stamp Duty, 0.5% Registration Charges
Furthermore, real estate builders will now receive the benefit of input credits on materials such as steel, cement, sand, which will be deducted from tax liabilities. It has been anticipated by the government that builders will transfer these benefits onto the end consumer by way of price reduction/installments with a view to boost consumer demand in a tepid sales environment. The government in a recent statement has alluded to using ‘anti-profiteering’ rules in line with the Directorate General of Safeguards (DGS) stipulations, as a deterrent to ensure builders transfer these benefits to the end consumer. It is, however, in the interest of the sector as a whole to maximise consumer demand and encourage purchase activity.
GST of 18 percent tax will be applicable for leasing commercial properties. Experts have clarified that the threshold limit for the applicability of GST has been increased from Rs 10 lakhs to Rs 20 lakhs. Hence, some of the landlords that came within the purview of the service tax regime, may not be included under the tax net of the GST.
GST is slated to be applicable on financial services at an 18% rate. Hence, loan processing charges are expected to increase in the GST regime.
The affordable housing segment has been currently exempted from service tax and hence a clarification is expected on GST for affordable housing. Additional clarifications are also required with respect to abatements and composition schemes.
The introduction of RERA, the GST, REITs, Benami Transaction (Prohibition) Act and other government initiatives such as demonetisation, contribute to enhancing transparency and accountability across the sector. For the NRI market, it is anticipated that with the easing of purchase norms combined with these measures, there will much needed simplification to the transaction process which should contribute to increasing confidence in the sector. It is also important to remember that when buyers purchase properties, they focus on the value, their individual needs/requirements and potential appreciation of the asset, rather than on taxation slabs!
A uniform tax structure in markets such as Indonesia, Thailand, among others has been seen to be a catalyst to increase investment. With the introduction of input tax credits, there is now an incentive for added transparency at the construction stage, an area that has been of concern to investor’s previously. Limited visibility on transactions and questions around the credibility of companies across the sector has often been a reason for hesitance among investors, especially with respect to equity deals. A combination of these measures should in the long run help improve the perspective of investors and consumers towards the sector.
With the introduction of RERA and the GST, the real estate sector is metamorphosing into a transparent, tightly controlled and regulated industry. All these measures will, in the long run, create stable businesses, as well as contribute to reducing the trust deficit between the consumer, the investor and the developer. Hence, a simplification to the existing complex taxation systems should be welcomed positively as we get more structured as an industry and as an economy