GST has been one of the long awaited tax reforms in the country that got unanimous approval of both houses of parliament this monsoon session. The union government of India has planned a deadline of April 2017 for its roll out. Currently, 3 states have already ratified the bill which later will be quickly followed by the others. How this might impact taxes in residential real estate transactions has got many views from the industry experts. Let’s understand it in brief –
Taxation and real estate industry
If we quickly take a look at the real estate industry, we find there has been a major tax change in the last few years. These taxes, however, are not uniform all over the country, different practices and regulations are followed to their respective states in India.
In the case of land, property and other kinds of work contracts, there are different kinds of taxes that are levied by the State Government and the Central Government. These transactions are categorized into three parts –
- The value of services
- The value of goods and materials
- The value of land
VAT is applied by the State Government on the goods portion and the value of services is framed by the Central Government. However, other than stamp duty, there are no clear taxes on the transactions regarding the value of land. This situation leads to confusion and eventually can result in dual taxation.
Here, the real estate industry has justifiably been feeling jittery during such confusing tax calculations. For a real transaction, multiple taxes need to be paid and this also has a negative effect on the industry. The ultimate need for the industry’s demand to bring GST on board is primarily to get a clear and transparent taxation rule for the real estate sector in India which will help the overall economy of the country.
Expected GST effects on the real estate industry in India
The implementation of GST can prove to be a solid step in reforming indirect taxation in India. Though there are chances of double taxation, it would be diminished, as some of the Central and State Government taxes will be amalgamated as one. This will indeed ease the process of taxation at a considerable rate, making its enforcement and administration much simpler.
Talking about the real estate industry in this context, there are a few things that we have to know and understand. In the current scenario, a builder or a real estate developer incurs many kinds of expenses in the construction phase of a project. Here, different kinds of taxes are involved with these expenses, like VAT/CST, customs duties, the service tax, and excise duty. But the majority of these taxes are expenses that derive from within the policies of the system. This is because they are not creditable to the developer or end-customer by any means. They are usually non-creditable expenses that lead to tax inefficiency.
But the one positive impact that might result from GST is by monitoring the credit utilization. This will for sure help in strengthening the credit chain in the whole system. If the property developers and builders properly manage this aspect, they will see some profits in the near future.
There is an expectation that the proposed GST structure will have a progressive and streamlined approach. Also, it is anticipated that the tax compliance rules might not have any serious impact on real estate builders and developers. In the present condition, builders running projects in different states are to comply with State-specific VAT laws, as well as other kinds of service taxes. Introducing GST will therefore not bring any additional burden on real estate builders present in the country.
However, much depends on what rate of GST will finally be confirmed by our government. If it is more than the existing cumulative taxes then it means that the overall cost to consumers of buying an under-construction flat will likely increase along with the additional cost of stamp duty and registration. At the same time, developers have to keep an eye on costing policies, as price competitiveness is very important in the current real estate market scenario.
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