By Vineet Relia
The Goods and Services Tax (GST) has come into effect in India from July 1, 2017 and it is a revolutionary tax reform. GST is to have a multi-edged positive impact on the residential realty sector, bringing in more transparency, abolishing multiple taxation system, and making the system more systematic and streamlined.
Before GST was launched, a home buyer had to pay value added tax (VAT) and service tax prior to the completion of the project. There were also other taxes like excise duty, customs duty, CST, entry tax which had to be paid by the developer on his procurement side, building up into the pricing of the units. All these add around 22%-25% of the price of the house. With GST implementation, now there will be smooth flow of credits through a confined channel.
The government has offered some clarity on the abatement rules for under-construction houses and input tax credit benefits for developers.
The government has fixed a goods and services tax (GST) rate of 18% for work contracts, giving the impression of a higher burden on the construction sector. However, a closer look suggests the actual tax incidence under the GST regime has lowered than the earlier one, thanks to the facility of input tax credit (ITC) on raw materials. Also, the new indirect tax regime has simplified the earlier convoluted tax structure by treating work contracts as only services. Earlier, the Centre had levied a 6% services tax on construction work contracts (after a 60% abatement), states imposed a value-added tax of 1-4.5%. However, the ITC (input tax credit) facility was unavailable on the payment of taxes on raw materials like steel and cement earlier which the earlier tax incidence was quite high and varied from state to state. Work contracts cover both commercial and residential infrastructure projects in the older tax regime.
Under GST, builders are to get ITC against their payment of taxes on key inputs like steel and cement. The steel products will be taxed at 18%. The earlier indirect tax incidence of roughly 17.5%, those of cement will attract 28%, compared with around 23-24% earlier. The 18% GST rate for work contract may optimally look high but since additional credits will henceforth be available, the total tax impact may be lower than the current indirect tax.
A report by Cushman and Wakefield says that residential project launches have fallen by 8% since RERA 2016 (Real Estate Regulation Act) was announced. With GST enrolling in the country, it is expected that there will be a positive impact on the residential segment.
Important points of GST in real estate
# Land leasing, renting of commercial properties and purchase of under construction housing projects have attracted GST
# Electricity has been kept out of the GST ambit
# GST rate for coal is 5% (coal is used in making steel and some other products used for house), which is much lower than the earlier tax rate of 11.5%
# GST rate for natural sand, pebbles and gravel has become 5%
# For lifts and elevators there is 28% of GST
In addition, every state had different state-level taxes. So, the implication of GST is not uniform across all states.
(The author is managing director, SARE Homes)