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Gaurav Srivastava | 17 Mar 2023

One Year of GST in Real Estate Sector, Impact on Home Buyers

One Year of GST in Real Estate Sector, Impact on Home Buyers

The one sector in India, where the maximum amount of tax evasion and cash generation takes place and which is still outside the GST, is real estate. Some of the states have been pressing for it. I personally believe that there is a strong case to bring real estate into the GST,” Jaitley said while delivering the ‘Annual Mahindra Lecture’ on India’s tax reforms.

The Good and Services Tax (GST) a revolutionary tax reform has made the country a ‘tax-neutral’ nation completes one year on July 1, 2018. This new tax regime effectively replaced the earlier complex taxation system that existed in India such as central excise duty, VAT, service tax, commercial tax, octroi, etc. 

Since the real estate industry is considered the second largest employer in Indian economy after agriculture, as it contributes an average of 5-6 % to the GDP, this realty sector is expected to reach $180 billion in revenues by 2020, therefore, provides a major tax base for the Indian government.

With the first anniversary of the GST, let’s know how the real estate sector has taken the change in tax structure in the country. Reduced Good and Services Tax (GST) - for affordable housing has brought a major relief for home buyers searching for low-budget residential homes.

However, after the implementation of GST in real estate, the only clarity buyers get on the prevailing GST of 12% on under-construction projects. There is still no clarity on the amount of rebate that a potential home buyer is entitled to on the back of the overpass of Input Tax Credit (ITC). There is also no clarity on the mode and tranche of the rebate due to the complexity of calculating it. 

Impact On Ready-To-Move And Under Construction Properties

In the case of a ready to move property, there is no incidence of GST. However, in terms of under-construction property, there are majorly two types of customer segments; one is those who purchased an under-construction property before the implementation of GST and the second are those home buyers who have purchased an under-construction property after the implementation of GST. For the first type of customers, the incidence of GST will be very specific to the case depend on the process of construction and the value of land in the house price. For the second type of customers, the GST rate is clear at 12 % (after abatement for land).

According to Mr. Hari Mohan Sharma, Director-Strategy, clicbrics.com, “The implementation of the GST has resulted in the reduced tax burden on actual home buyers who purchase ready-to-move-property or Occupancy Certificates (OC) - ready projects. So, in proportional, ready-to-move property cost is less than under construction property on the verge of 12%". 

GST’s impact on property prices– Luxury segment

In case of premium properties, while the basic construction cost may have reduced a little, but as the ITC is limited to 12 %, it will not be enough to bring down the fresh tax liability to zero due to the taxes paid on other expenses.Under the tax regime, most of the building materials are under the 18 and 28 % tax slab. For example, steel and steel products for construction materials, are mostly under the 18 % segment while cement and prefabricated structural components for construction materials are mostly under the 28 % segment. However, as the ITC is available on construction products, the overall tax incidence needs to be neutralized.

Impact On Warehousing

Logistics and warehousing segment is another prominent segment of the real estate sector which has been significantly influenced by GST. With the introduction of GST, warehousing activities carried out for the only purpose of avoiding tax have become useless. Travel time for inter-state transportation has also reduced because of the elimination of state entry barriers. GST has also reduced the costs comes under the taxes and state permits.

Grey Areas In The GST 

Considering that we have spent just a year in this new regime and the GST law has to mature further and certain process needs to be refined on a regular basis. There are certain areas which are yet to be evaluated and the government should rectify for a smoother experience: 

  • Taxability of land value where the realty developers have contracted separate agreements for the lad supply and construction portion.
  • Developers are ineligible for refund under the inverted duty structure where inputs are charged at higher tax rate and output is charged at a lower tax rate. 
  • Incorporating different tax computation methods for different projects or phases of the same project. 
  • Taxability of clubhouse charges, water and electricity deposits, preferred location charges, car parking charges and eligibility of one-third land deduction abatement on such charges. 

Long Way To Go

The Goods and Services Tax (GST) that came into effect on the 1st of July 2017 has just completed one year and has seen quite a few speed breakers. There is still a long way to go in order to achieve “one-tax one-nation” in spirit. But, we are optimistic about the potential of this tax reform, which will eventually have a great impact on the real estate industry.


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