Realty check: GST & its impact on real estate

The introduction of RERA followed by the roll-out of Goods and Services Tax (GST) seems to have plunged the real estate sector into an array of sudden confusion. Nevertheless, the goal of the government to make housing affordable to the vast majority along with building a robust infrastructure for the country may come a step closer in the wake of these drastic changes.

Since the new tax regime is situated in the ‘one nation, one tax’ policy, it is meant to create a uniform structure and ease the burden on the consumer. With the implementation of the said changes, a question does arise, ‘what are the effects of the indirect tax regime on the real estate sector?’

Under the GST umbrella

GST unified all indirect taxes levied on transactions concerning goods and services. Accordingly, any supply of goods or services with respect to the under-construction property will attract GST either in the hands of centre alone or in conjunction with the state and union territory, depending on where the goods or service has been supplied from and where the supplier is situated.

It is important to note that transactions relating to immovable property have so far been kept out, though there is no denying that the government has made its intentions clear to include such transactions under the GST regulations as well.

The effective resolution of the teething problems and the level of transparency achieved for transactions already under GST will determine whether and how soon such transactions are brought under the new indirect tax regime.

Effect on homebuyers

How does this paradigm shift in the tax structure affect common homebuyers? The direct impact is on the cost of acquisition of the under-construction property, it is expected to go down. This is because GST at the rate of 12-28% would be applicable on goods in place of the erstwhile excise duty (approx 12.5%) along with value-added tax (approx 12.5%), and would now be available to the developer as input tax credit to be utilised to offset the outward liability.

Under the erstwhile tax regime, the credit of value added tax could only be utilised to set off the VAT liability and service tax or excise duty against service tax liability in the hands of the developer. Cross fungibility was an issue and would often result in an increase in the cost of the property.

Once the developer gets the benefit of reduced rates on inputs and input services, he is obligated under the anti-profiteering provisions to pass on the benefit of increased availability of input tax credit to the home-buyer.

Further, the rate of GST on under-construction property i.e. in respect of which no occupation certificate has been issued is treated as services in the hands of the developer at the time of transfer. This attracts GST at the rate of 18%. However, GST is only applicable on two- third value of the property as one-third value is considered as the notional value of land.

In case of ready to move in property sold after obtaining the occupation certificate, input tax cannot be utilised and the cost of which gets embedded into the price of the property that is ultimately borne by the end consumer.

The fine print

Even though the purchase of under-construction property seems to be profitable for a consumer or a developer, the desired benefit of complete credit fungibility is still not achieved due to the peculiar provisions set out under GST. For instance, the notional value of land is deemed to be one-third of the contract value.

This logic is flawed since, in Tier-1 cities, the value of land often makes up more than one-third of the contracted value determined by principles used for the purposes of payment of stamp duty. On the contrary, there are many cities and small towns where the value of land is relatively less than one-third of the contract value.

Yet another roadblock is present under the valuation rules. Taxes which do not form a part of the GST regime are included in the value for calculation of GST. This results in a cascading effect as the consumer is effectively paying tax on another tax.

When developers get any structure constructed for the purposes of commercial leasing in their own name, they are not entitled to claim the credit of GST paid on works contract service provided by any sub-contractor which forms a major chunk of the input services availed. This again escalates the already high cost of commercial leasing, making the whole exercise unprofitable.

Another point that is missed out is on extending the benefit of reduced rate of 12% applicable to persons directly dealing with the government to the sub-contractors knowing very well that in such one-sided arrangement, it is always the sub-contractors who shell out 18% of the tax.

With frequent meetings of the GST Council, it seems that these issues will get highlighted provided effective representation is made by the participants.

It is commendable that even under grave oppositions from innumerable stakeholders and with no serious testing of the IT infrastructure, the government went ahead and introduced the GST. However, it will take few more months if not years for the industry not only to grapple with the mammoth change but also to realise the positive effects.

Nevertheless, unlike in the case of all other sectors, the work of fine-tuning the law through the various meetings of GST Council needs to be facilitated for real estate, as the pulse of any growing economy is its infrastructure.


(Rashmi is associate partner, Anjali is associate, Khaitan & Co.)