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Impact Of GST On Real Estate

Mr. C.S. Sudheer | Posted On Thursday, June 29,2017, 04:19 PM

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Impact Of GST On Real Estate



The goods and services tax commonly known as GST will be launched across India on July 1st, 2017. This is a game changer for the Indian economy. GST is a single indirect tax which will replace all other taxes like central and state taxes, excise duty, value added tax (VAT) and service tax. You must be keen to know how GST affects your property purchases. Buying a property could be one of the biggest financial decisions you ever make. Lots of questions must be running through your mind. Does GST have any impact on the cost of the under-construction apartment you have just booked?

After GST, you may just have to pay a little more for that under-construction apartment. Wondering why? The main aim of GST is to bring down the project costs of developers/builders. Developers are then expected to pass the benefit of lower costs to you and other customers, looking forward to that dream home. But is this happening? Let's find out.

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Impact of GST on the Residential Real Estate

1. Effect of GST on under-construction property

Take a look at taxes on the under-construction property before GST. You have a 4.5% service tax on the value of the apartment (with input credit) excluding stamp duty + 1% value added tax (VAT) mainly in the state of Maharashtra. After GST, a heavy 12% tax will be charged on the property value of all under-construction properties. Then you have the stamp duty of around 5%. Around 17% of the cost of the under-construction apartment will go in paying taxes and stamp duties. This is a very large amount. This will surely make you cry.

But there's hope....Yes, there's a 6.5% increase in tax you have to pay once GST kicks in but, you get the benefit of input tax credit. The benefit of input tax credit is on the construction costs which is passed on to you and other customers, but not on the cost of land. Unfortunately, the cost of the land makes up most of the expense in your under-construction apartment. You don't get any input tax credit on this.

Expect the cost of your under-construction apartment especially in metro cities and other large cities to go up after GST.

2. Buyers of under-construction apartments are happy with GST

Let's say you had purchased an under-construction apartment before GST. You would have paid value added tax (VAT) and also service tax. VAT is charged by the State Governments and differs from State to State. Service tax is charged by the Center and is fixed at 15%.

You would find it very difficult to understand all these taxes and their effect on the cost of your property. You don't understand what amount of VAT is charged at what level and what part of it is passed on to you by the developer. You have to rely on the clauses mentioned by the developer in the sale agreement which is quite difficult to understand. 

See Also: GST Tax Rates In India

No amount of research can help you understand tax charged on the under-construction properties. Won't you be happy if there was some clarity on taxes? If GST brings that clarity, won't you and other customers be very happy even if you have to pay a higher rate?

3. Effect of GST on affordable housing

The Government is very serious on affordable housing. It has even given affordable housing, Infrastructure Status, which makes the raising of funds quite easy. The Government even has a vision for affordable housing called  ‘Housing for all by 2022’.  This is what Union Urban Development Minister Venkaiah Naidu has to say on affordable housing. Affordable housing has already been exempted from service tax. It will continue to enjoy this exemption even under GST.

There will be no tax under GST on housing projects which come under the affordable housing scheme.

4. Developers will pass on the GST benefits

Developers have no choice but to pass on GST benefits under the anti-profiteering clause. The objective of the anti-profiteering clause is to make sure developers do so. Developers could be penalized if they don't pass on GST benefits.

Yes, the cost of your under-construction apartment will go up after GST. To make up for this higher cost you get the benefits of uniform taxation and clarity on taxes. You would be more than willing to pay this higher amount. There is no GST on ready-to-move apartments and properties.

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