The Goods and Services Tax (GST) has been introduced in the year 2017 and has had a large impact on the various economic sectors across the country. Real estate is one of the sectors in the Indian economy and it accounts for about 6-8% of the country’s GDP. There has been a mixed view on the impact of GST in the real estate market.
With the introduction of the GST, the industry has witnessed several relaxations, mainly in the rental sector due to which there has been an increase in the investments in recent years. GST became favorable to the real estate market as the tax rates fell from 12% to 5% and are considered a phenomenal impact on the industry.
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Impact of GST on Real Estate
The key impacts that the GST has on real estate include the following:
- The already completed building that possessed a certificate was exempted from taxes while the under-construction building was placed in the 5% tax rate segment.
- The construction industry in comparison with the completely constructed properties faced issues or had less investment that was made, as the price of the property increased due to the taxes that were levied on the materials used for construction activities.
- Another major concern faced by the under-construction properties was that there was an inordinate delay in the completion and this led to a decrease in the satisfaction of the customers. Many of the builders also filed for insolvency.
- There have not been large variations in the price of the property even though exemptions in the stamp duty and the registration were introduced.
- There has been an increase in the transparency and accountability that has been caused due to the introduction of GST and its modifications.
- Affordable houses and those under the economic segment became more thriving as they only had 1% GST attached to them.
- The developers received various benefits under GST as many of their construction costs subsumed due to the reduction in multiple take. It was also due to the input tax credit. Since there was a reduction in the cost of logistics, they were benefited. Hence this helped them to achieve improved margins.
- Despite the existing laws, there has been a large amount of expenditure that was left unrecorded. After GST was introduced the availability of the credit facilities and the cloud storage invoicing has helped in reducing the recording of expenditure.
- The under-construction properties were required to pay 12% GST while the complete or ready for sale properties enjoyed exemptions. The buyers thus began purchasing construction completed properties as they were more profitable.
- The segment of real estate that was most benefited from the introduction of GST was the rental segment.
- The threshold limit for the rental commercial buildings from Rs. 10 Lakh to Rs. 20 Lakhs due to which the tax liability that is borne by the owner was eased.
- The fact that GST was complex to calculate were some of the negativity and discouraging investments.
- Reverse Charge Mechanism (RCM) is another aspect that negatively affects the decisions of the people. Under this, if a person purchases a property from a person not registered under GST then he is also levied with the tax amount and he has to make the payment of the same.
GST rate in India for real estate
The GST council has amended the tax structure in the year 2019. The GST council had come up with new rates for the housing units in the year 2019. It was decided by the council that the owners will be taxed at an effective price of 5% without any benefits of ITC on residential properties that are above the affordable segment and under construction. It is to be noted that those projects should have been booked before 01.04.2019.
The council also decided that GST of 1% shall be levied on the properties that fall under the segment of affordable houses. 1% is also charged without any input tax credit for those properties having construction works going on for affordable houses. This was the same for those affordable houses that have been constructed in the underway projects below the existing central and state housing schemes which are eligible for a concession of 8% GST.
The tax rate of 1% (on affordable houses) and 5 % (houses other than affordable houses) are subjected to certain conditions. These are:
- Input tax credit or ITC will not be available.
- 80% of the inputs and the input services shall be purchased or hired from a person registered under GST. On the contrary to this condition, the builder will be required to furnish 18% on the Reverse Charge Mechanism basis. However in case, the cement has been purchased from a person not registered under GST, then the builder has to pay 28% based on the Reverse Charge Mechanism.
The residential property irrespective of it being a house or a flat with an area of 90sqm in a non-metropolitan city or town and a house or flat in an area of 60sqm in a metropolitan city which values up to Rs. 45 Lakhs have been classified as affordable houses. The metropolitan cities include Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata, and Mumbai.
The reversal of the tax input is calculated proportionately. However, this has been criticized because it brings in significant computation issues to the builders as one project varies from one to another based on their stage of construction and their type of sales pattern.
What is the PMAY Scheme?
Pradhan Mantri Awas Yojana was a scheme launched on 1 June 2015 with the intention to provide the urban poor with affordable housing facilities. It is a Credit Linked Subsidy Scheme (CLSS), which means beneficiaries under the PMAY scheme are eligible for interest subsidy if they avail of a loan to buy or construct a house. By the introduction of this scheme, the government aims to provide comfortable housing to the urban poor by the end of 2022. An application for the scheme can be made if you match the eligibility criteria. Housing & Urban Development Corporation (HUDCO) and National Housing Bank (NHB) are two nodal central agencies appointed to channelize the subsidies.
Summing up, it can be stated that there has not been a large impact in the residential sector as the pros that have been brought in with the introduction of GST. However, the real-life impact of the 2019 amendment to the GST rules in real estate needs to be analyzed in the coming years.
However, on a brighter note, it can be stated that the leading industry analysis and major players have stated that the amendment will bring a positive impact on commercial and residential investors. Data are showing an expected increase in home sales by 16% in the year 2019 than in 2018. However, there may not be many changes in commercial properties.