The real estate industry is one of the essential pillars of the Indian economy. The real estate industry contributes 6-8 percent of India’s GDP and is second only to the IT industry in job creation. With multiple taxes such as service tax and VAT previously in place, the indirect taxation in this sector has been completely revamped with the introduction of GST. In this article, we will attempt to articulate the impact of gst on real estate sector.
Impact on Buyers
Buyers had to pay VAT, Service tax, Registration charges, and Stamp duty to purchase properties under construction under the previous tax regime. Also, because VAT, registration fees, and stamp duty were state levies, property prices varied from state to state. Furthermore, developers were required to pay various duties such as sales tax (CST), customs duty, OCTROI, and so on, for which credit was not available.
GST applies a single tax rate of 12% to properties under construction, whereas GST does not apply to completed or ready-to-sell properties, as was the case under previous law. As a result, buyers will benefit from price reductions under GST. In the short term, buyers may take a “wait and see” approach to better understand the impact of GST on property prices and postpone purchasing decisions.
Also, in the long run, GST will benefit buyers if the developer’s input tax credit is passed on to the buyer.
Impact on Builders, Developers, and Contractors
Previously, developers had to pay Excise duty, VAT, Customs duty, Entry taxes, and other taxes on raw materials/inputs and Service tax on various input services such as approval charges, architect professional fees, and labor charges legal charges, and so on. ITC was not available for duties such as CST, Customs duty, Entry Tax, etc. It would affect pricing, and the burden would be transferred to the buyer.
Developers’ construction costs are significantly reduced under GST due to the subsumption of multiple taxes and the availability of input tax credit. Additionally, the cost of logistics will be reduced. As a result, developers’ profit margins may improve.
Impact on other Stakeholders
The impact on allied services such as labor, material suppliers, service providers, and so on is determined by the amount of tax levied on these goods and services. It will have ramifications for the real estate industry as a whole. Cement, for example, was previously taxed at an effective rate of 27-31 percent but will now be taxed at 18 percent. Increases in cement prices will raise the overall cost of construction.
Reverse Charge Mechanism
The concept of RCM was borrowed from the former Service tax law. The scope of RCM has been significantly expanded in GST, which may hurt developers.
One of the significant additions to RCM under the GST law is that if goods or services are obtained from a person who is not registered under GST, a registered person must pay GST on all such supplies. To know more about gstr 3b late fees – click here.