IMPACT OF GOODS AND SERVICE TAX (GST) ON INDIAN REAL

ESTATE SECTOR

Dr. D. K. Parmar1, Dr. S. K. Dave

2

1Lecturer, Applied Mechanics Dept., B & B Institute of Technology, V V N, Gujarat, India 2H.O.D., Civil Engineering Dept., B & B Institute of Technology, V V N, Gujarat, India

ABSTRACT

GST also known as the Goods and Services Tax is defined as the giant indirect tax structure

designed to support and enhance the economic growth of a country. More than 150 countries

have implemented GST so far. However, the idea of GST in India was mooted by Vajpayee

government in 2000 and the constitutional amendment for the same was passed by the

Loksabha on 6th May 2015 but is yet to be ratified by the Rajyasabha. However, there is a

huge hue and cry against its implementation.

A single indirect tax which covers all goods and services will, in the long run, increase tax

collection by making it easier for retailers and several other businesses to comply and also

moderate overall taxation levels. That said, it should be remembered that the favourable

effects of this new taxation regime will become evident only within 2-3 years of its

implementation.

Though the goods and services tax (GST) tax structure has been announced, there is still a

lot of conjecture about which tax rate will be applicable to the real estate and construction

industry.

INTRODUCTION

The switch-over to the GST regime is undoubtedly one of the biggest tax reforms in post-

independence India. From July 1 2017, GST effectively cuts through a confounding Gordian

knot of taxation complexity in the country. In other words, it replaces the multiple taxes

levied by the central and state governments and will become subsumed of all the indirect

taxes, including central excise duty, commercial tax, /charges, Value-Added Tax (VAT) and

service tax. [1]

However, the biggest game changer in GST is the introduction of Input Tax Credit, whereby

credits of input taxes paid at each stage of production or service delivery can be availed in the

succeeding stages of value addition. This makes GST fundamentally a tax only on value

addition at each stage. [2]

This means that the end consumer will thus only bear the GST charged by the last dealer in

the supply chain, with set-off benefits at all the earlier stages. To ensure that manufacturers,

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developers and service providers pass on the benefit to the final customer, the Government

has included an anti-profiteering clause in the GST bill under section 171 of GST law. This

clause clearly states that it is mandatory to pass on the benefit tax reduction due to input tax

credit to the final customer. [3] [4]

The various taxes were applicable in a residential real estate transaction before GST

1. SERVICE TAX

If you are purchasing an under-construction property, developer will have to charge you

service tax and deposit it with central government. This tax was not applicable till 1st July

2010. The key reason for the same was contract between builder and buyer for construction

of residential unit was disputed as works contract as it also includes value of land. Hence

rules regarding taxes on work contract were not applicable on residential complex

construction. In finance act 2010, government added an explanation to definition of

construction of residential complex and made it deemed service. [5]

For the simplicity sake government has given abatement of 3/4th of cost of unit as land and

goods for construction and only 1/4th of the cost of unit is treated as service. Hence presently

most homebuyers are paying 3.75% of cost of unit as service tax (1/4th of 15%). Recently

service tax on under construction property has again been put under question as Delhi High

Court ruled against this and matter is sub-judice at Supreme Court of India. [5]

2. VAT (VALUE ADDED TAX)

If you are purchasing an under-construction property, you will have to pay additional VAT in

some states such as Karnataka, Haryana and Maharashtra. Developers charge this value

added tax and deposit it with state government. VAT has also been under dispute for long

time and still there are many states such as UP who do not charge VAT. Also unlike service

tax there is no uniform way of computing VAT across states. To calculate accurate value of

VAT and not use composition scheme, developers will have to maintain proper accounts of

goods purchased for construction and VAT paid by them for the same to get input credits

which is cumbersome and makes it tough for buyers to understand. [6] [7]

3. STAMP DUTY

Stamp duty is charged by state government, again at varying rates, for registration of sale

agreement for real estate transactions.

Incidentally if you are buying a ready to move-in property directly from developer after he

has obtained completion certificate from authority, you don’t need to pay service tax and

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VAT hence saving 3.75% to 9% of property cost depending on state where you are buying

property. [8] [10]

IMPACT ON RESIDENTIAL REAL ESTATE:

The real estate sector is estimated to account for about five per cent of India’s gross domestic

product (GDP) and is considered the second-largest employer in the country, according to an

E&Y report from 2015.

However, the sector faces issues in terms of macroeconomic conditions and fiscal policy

decisions. One such challenge is the management of the multiple indirect tax levies, such

as VAT, service tax, excise and stamp duty and registration fees.

To say the least, the Indian real estate sector has been going through significant transform in

the recent times. The recently implemented Real Estate and Regulation Act (RERA) has

already started addressing the issue of non-transparency and affixes a level of accountability

on real estate builders and brokers which is unprecedented in the history of the Indian

property sector. [7]

For the residential real estate sector, the implementation of GST will definitely be a positive

sentiment booster among property buyers. GST may not be instrumental in bringing down the

prices of residential real estate over the short term. However, it will benefit all the

stakeholders of the residential real estate sector, as the perception of the sector will improve

on the back of a simplified tax structure and accountability being fixed at every stage. [9]

IMPACT ON RENTAL HOUSING

Other doubts pertain to the rental housing market, which would naturally be impacted if

the government were to tax residential leases under GST. The common apprehension is

that if this were to happen, the rental housing segment may see a huge slump over the

medium-term, since residential leases are currently not taxed at all. [10]

Here, it is pertinent to note that residential leasing is an inherent demand which will not

evaporate merely by higher taxes. Certainly, we may be looking at a rental stagnation or

marginal decline as the market readjusts to the new dynamics which GST will infuse.

However, rental housing demand is sticky and end-user-driven in nature, so we are

definitely not looking at a major slump in this segment because of GST even if it does tax

residential leases. [11]

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That said, rental yields in major cities could certainly moderate if GST is levied on rental

housing. In India, rental yields in housing are quite modest at around 2-4% on an average.

Rents may either hold steady or decline marginally due to increase in housing stock.

However, it is also true that most investors in the residential sector do not invest for rental

yields but rather for the capital value appreciation, so reduced rental yields would not

independently impact sentiment. [12] [15]

IMPACT ON COMMERCIAL REAL ESTATE

When it comes to GST's impact on the commercial office real estate market - with the

existing service tax for commercial leases at 15%, GST would be likely neutral overall (at

12% slight savings, and at 18% slight increase). [13]

IMPACT ON AFFORDABLE HOUSING

Affordable housing was previously exempt from service tax. The affordable housing sector,

which is a major thrust area of the incumbent Government and is the cornerstone of its

'Housing for all by 2022' vision, will not be impacted by GST. This has been clarified by the

announcement from the Finance Ministry, which indicates that there will be no tax under

GST for housing projects which comes under the affordable housing scheme. [10] [14]

CONCLUSION

GST will free end-consumers from the hassle of paying several state taxes at different levels,

therefore removing the double taxation impact. Also, the implementation of GST will hugely

benefit the NRI community towards investment in real estate through the formation of a

seamless all-inclusive channel. The existing channels include issues of multiple taxation and

amounting to indirect taxes and no uniformity.

In totality, “GST will add up as another factor among the government’s other schemes

towards affordable housing, which is beneficial to the growth of the sector. Buying a home

will now be easier as benefits will now be extended to both the developers and the end-

consumers,”

REFERENCES

1. Agogo Mawuli (2014): “Goods and Service Tax- An Appraisal” Paper presented at the

PNG Taxation Research and Review Symposium, Holiday Inn, Port Moresby,29-30.

2. Girish Garg, (2014),“Basic Concepts and Features of Good and Service Tax in India”.

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IJSRE September, Vol-1 Issue-8 www.ijsre.in Page 4

3. Ehtisham Ahamad and Satya Poddar(2009), “Goods and Service Tax Reforms and

Intergovernmental Consideration in India”, “Asia Research Center”,LSE,2009.

4. www.businesstoday.in

5. www.proptiger.com

6. https://economictimes.indiatimes.com/wealth/real-estate/how-will-gst-impact-the-indian-

real-estate-sector/articleshow/58588312.cms

7. https://www1.avalara.com/in/en/blog/2017/09/impact-gst-indian-real-estate-sector.html

8. https://www.proptiger.com/guide/post/gst-the-real-estate-sector-all-you-need-to-know

9. https://housing.com/news/gst-real-estate-will-impact-home-buyers-industry/

10. https://www.indiainfoline.com/article/news-top-story/gst-impact-on-construction-real-

estate-gst-impact-little-change-in-net-effective-tax-rates-on-construction-and-real-estate-

sectors-icra-117052500675_1.html

11. https://www.quora.com/What-is-the-impact-of-GST-bill-on-real-estate-industry

12. http://www.moneycontrol.com/news/business/economy/gst-rates-under-construction-

properties-to-attract-12-tax-2284599.html

13. http://www.moneycontrol.com/news/business/personal-finance-business/gsta-positive-

development-for-real-estate-1485619.html

14. http://www.livemint.com/Politics/q3JIl1G2gPxrzY3mAJY8nJ/How-GST-impacts-auto-

real-estate-retail-telecom-and-retai.html

15. http://www.klassikbuild.com/blog/impact-of-gst-on-real-estate-sector/

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