Possible impacts of GST Bill in real estate

After months long of negotiations and dramas, August 3, 2016 has finally embedded itself as the historic day for India which witnessed the passing of GST Bill for amending the constitution, clearly opening the road towards ‘one nation, one tax’. Besides the solitary objection from AIADMK, the bill was unanimously passed in the Rajya Sabha. The revolutionary amendment will enable the Centre and State to collect tax through Central GST (CGST) and State GST (SGST).

Even though the potential of the impact can only be determined once the final tax rate is out in the new regime, real estate experts believe it to be benefitting the sector. Real estate sector is one of the significant contributors of the country’s GDP (Gross Domestic Product). However, if the final GST rate will be exceeding the prevailing cumulative taxes, then the new bill is going to be a stick in the mud as it increases the cost of buying an under-construction flat.

The bill is in its nascent stage and time is tender to predict the effect on real estate sector. But as the taxes will be rationalized for commodities like cement, steel, bricks, rods etc, the overall construction cost is likely to be reduced for claiming long term capital benefits for buyers. However, the stamp duty will not be consumed together with the GST tax rate.

Effects of GST Bill on properties

  • Sale of constructed or immovable property: According to Model GST Law, every kind of movable property falls under the term of ‘goods’. Hence the sale or transfer of a property after the construction should not fall under the jurisdiction of GST. It is also to be noted that the tax for purchasing the materials used for construction of the property is not creditable and the builders have already added it in the property price. Once the GST is implemented, there are no big changes to be expected in the prevailing scenario. The stamp duty will prevail, but on the procurement side, certain range of taxes like VAT, service etc will be replaced by the single GST.
  • Under construction property: On contrary, sale of under-construction properties will fall under the armpits of GST as under construction properties are regarded as works in contract which can be treated as service. However, proper abatement for the value of land should be provided, for which clarity is still being awaited. For an under construction property, GST will be applicable for the output side where the credit of GST should be provided. But according to the clause mentioned in the Model GST Law, there is no terms for to claim the credits of GST paid while construction of the property. This clause will create some concerns as it may lead to litigations.
  • Construction of property for leasing: The construction of properties for leasing can be expected to fall under the jurisdiction of GST. In the prevailing scenario, leasing of commercial purposes involves service tax, while the leasing of residential properties does not involve tax. In the present regime for commercial projects, service taxes are applicable for lease rentals. But the input tax credits are not available. In the GST regime, taxes will be applicable for lease rentals and fingers will be pinpointed to whether the provision for crediting the GST input taxes will be available or not.

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