Benjamin Franklin once quoted taxes as one of the inevitable certainties in this world – and, when it comes to purchasing residential real estate in India, homebuyers have had to deal with many such complexities. From Value Added Tax (VAT), Entry Tax, and Central Excise to Octroi, Service Tax, and LBT, the process of buying a home conventionally came with a multitude of indirect taxes, all of which only increased the complexity of the transaction for homebuyers.
Three main reasons drove the need for a single, comprehensive indirect tax to replace multiple levies. Firstly, homebuyers and real estate developers had to deal with cascading taxes, or taxes upon taxes, which added an unnecessary financial burden during construction as well as purchase. Secondly, the lack of uniformity of tax rates across state boundaries left many finished and under-construction projects grappling with severe compliance issues. The lack of transparency in taxation also raised certain challenges in terms of fair industry practices. As homebuyers were typically unaware of the various taxes and applicable rates, unscrupulous players often manipulated the numbers at the expense of the end-consumer.
The introduction of the Goods and Services Tax (GST) in July 2017 greatly simplified this dynamic.
GST: One Tax to Subsume Them All
With different indirect taxes replaced by a single, unified tax regime, the initial GST rollout served to make homeownership more accessible and affordable for homebuyers and eased several issues pertaining to transparency, costs, and regulatory compliance for real estate developers.
The more streamlined structure helped developers to improve their tax compliance and also enabled them to claim an input tax credit (ITC) for GST paid on goods and services used during construction. As a result, they were able to offset their output tax and, consequently, the overall cost of project development. For instance, if a developer had to pay INR 20,000 on their final product and had already paid GST worth INR 15,000 while purchasing cement, steel, bricks, etc., then they would need to pay only INR 5,000 as output tax.
Such multi-level cost saving delivered significant financial advantages to homebuyers. Moreover, unlike previous tax regimes, GST only applied to properties under construction. This further reduced the cost of purchase for the end-consumer, as the service tax associated with the purchase of plots and read-to-move properties was completely eliminated. By simplifying the complex indirect tax structure, GST also ensured that buyers did not get unscrupulously charged for non-applicable taxes.
There were similar advantages when it comes to GST’s effect on rent. Landlords were not required to pay GST on rental income from properties let out for residential purposes. On the other hand, a GST of 18% was applicable if the residential property was rented out for business purposes, which making it a supply of services. However, under the GST regime, the tax would only apply if INR 20 lakh – a significant increase from the threshold of INR 10 lakh when service tax was in play.
With the tax rates governing real estate transactions changed after the 33rd GST Council Meeting, there are far-reaching implications to consider for the real estate ecosystem. And then there’s the all-important question: how will the revised GST rates affect home purchases? Let’s have a look.
Homebuyers, developers, and GST: What the latest reforms spell for the real estate industry
Prima facie, the post-GST real estate landscape is more conducive to homebuyers after the latest round of rate changes. Under the revised rates, GST is to be charged at 5% without Input Tax Credit (ITC) on residential properties that are not part of the affordable housing segment, instead of the previous rate of 12% (with ITC). For residential properties in the affordable housing segment, GST is to be charged at 1% without ITC, as opposed to the previous rate of 8% with ITC.
This reduction in the tax rates will reduce the upfront costs borne by homebuyers. For instance, a property priced at INR 1 crore will incur a tax of 5%, or INR 5 lakh, bringing the total cost (including taxes) up to INR 1.05 crore. This is around INR 7 lakh less than what would have been charged under the previous tax regime. Similarly, a unit in an affordable housing project priced at INR 25 lakh will incur a tax of just INR 25,000 – compared with INR 2 lakh that would have otherwise been paid as GST. These numbers represent significant savings for the end-consumer.
The elimination of ITC on GST applied to real estate transactions will also bring about several less-obvious benefits for homebuyers. To begin with, while the benefits of ITC were supposed to be passed onto the homebuyer in theory, its practical application left a lot to be desired. Developers often inflated property rates by adding unused ITC to their total project costs, with many never even accounting for the ITC benefits for the end-customer when pricing their residential units. With ITC no longer a part of GST for real estate, this conflict of interest gets eliminated, leading to fairer property prices, especially in the affordable housing segment.
It is important to note, here, that the tax rates (without ITC) under the revised GST regime are applicable on all new projects. However, as part of the transition, developers were also given the option to choose between the old and new rates for their ongoing housing projects by May 20, 2019. This offer was only applicable for projects that were yet to be completed as of March 31, 2019 – with the choice to opt for either tax structure resting completely with the developer.
The larger real estate ecosystem is also expected to benefit from the latest round of changes, even if the GST applicable on construction materials such as bricks, roofing tiles, and cement, etc. remains unchanged since December 2018. The cost benefits and lower upfront costs are expected to revive purchase sentiment, which will be crucial to the sector’s recovery in the wake of the COVID-19 pandemic. Other measures – such as increasing the tax deduction limit on home loan interest repayment to INR 3.50 lakh and the introduction of Section 80EEA offering an additional benefit of INR 2 lakh to first-time buyers of affordable properties – will also incentivise homebuyers to make purchase.
All of this is expected to stimulate an industry that, despite being amongst the top GDP contributors and job creators, has been facing an extended slowdown for the last couple of years. The increased demand brought about by GST rate changes can help real estate players, estimated to have an unsold inventory of almost 8 lakh units in the country’s top 8 markets alone, recoup their investments from finished projects and free up the capital to undertake future developments.
Leading industry players, however, demand more intervention, with a temporary GST reduction of up to 50% being recommended on construction materials. The move, it is argued, will help boost intrasectoral activity by enabling sellers and producers to retain a larger percentage of their incomes and giving them the financial bandwidth to conduct more transactions.
Regardless of whether or not this recommendation is accepted by the government, one thing remains clear: GST has, and continues to, increase trust, transparency, and efficiency for all stakeholders, from developers to homebuyers. The early market reaction to the latest round of changes is encouraging and points the way for a high-growth future for the Indian real estate ecosystem – and, consequently, a more vibrant and robust economy.
(By Amit Agarwal, Co-founder and CEO of NoBroker.com)