Is GST on real estate revenue-neutral?

Although the Goods and Services Tax, along with the provision for input tax credits, was meant to be revenue-neutral, compared to the previous regime, taxes on the housing market may increase. We explain why…

Anubhuti Roy, a fashion designer from Gurgaon, feels that the Goods and Services Tax (GST), has failed to fulfill its purpose in the housing market add has made houses costlier. “GST was supposed to reduce the tax burden in the housing market. Although I only had moderate expectations, I did not expect it to make housing costlier, for the average home buyers like me. A few developers are advertising that they will share the GST burden of the buyers. However, the reality is that they are only passing on the advantages of input tax credit to the buyers,” Roy laments.

Roy’s case is just one example of how buyers are reluctant to enter the housing market. Many home seekers are now waiting for projects to be completed, as ready-to-move-in apartments do not attract the GST burden. However, for buyers who have already booked projects that are under construction, the GST has suddenly added to their budget.

For example, a typical apartment in Noida would cost Rs 60 lakhs. As the cost of construction is roughly 25 per cent of the project cost, the service tax burden under the earlier regime, would have worked out to 3.75 per cent. Add to it, the stamp duty of seven per cent and a few thousand rupees in the registration process. So, all in all, the tax burden would not have been more than 11 per cent. Now, the taxation under the new GST regime would cost 12 per cent of the project (18 per cent GST minus land component). With the same stamp duty of seven per cent, the tax burden for a home buyer shoots up to 19 per cent, from the 11 per cent earlier.

 

GST does not eliminate multiple taxes on real estate, say developers

While developers can avail of input tax credits that they can pass on to the buyers, only a handful of developers have thus far, announced such moves, while glorifying it as sharing of the GST burden. Developers argue that the calculation of the revised sale price under the GST regime, is a complex and time-consuming task. Builders have to depend upon their contractors, to know the VAT and excise duty and also have to wait for the project to be completed, before they know how much price difference is possible in the final calculation. Moreover, the price difference is not enough, to bridge the gap between GST at 12 per cent and Service Tax at 3.75 per cent.

See also: GST on real estate: How will it impact home buyers and the industry

Aditya Kedia, managing director of Transcon Developers, maintains that real estate is one of the most complicated sectors, as far as taxation is concerned, with numerous direct and indirect taxes.

Under the GST regime also, other than GST, many state and local taxes are levied on the sector, in the form of stamp duty, registration charges, labour cess, property tax, municipal tax, development charges, etc. and there is no means yet, to subsume them under the GST. “With 12 per cent GST, stamp duty, registration and many other local taxes, the sector is burdened with many invisible taxes. If all these taxes have to be subsumed under GST, then, the tax rate has to go up or the government has to compensate the local bodies,” says Kedia.

 

Benefits under the GST regime may not reach home buyers

Parth Mehta, managing director of Paradigm Realty, points out that while the GST will not totally reduce the overall tax burden, it will serve to portray a good picture of the real estate sector. “Higher tax slabs are extensively hurting the real estate sector. Cement prices are going up marginally, as the GST Council has levied 28 per cent tax on the product. Higher taxes on materials, will be naturally transferred to the customers,” says Mehta.

Nikhil Hawelia, managing director of Hawelia Group, says that the aim under GST, was to keep taxes neutral, vis-à-vis all materials procured for the construction of a project. However, this may be difficult in an ongoing project, where most of the materials used for finishing are in the highest tax slab, which directly affects the cost of construction.

“Almost five months after the implementation of GST, most of the manufacturers are directly increasing their profits, by not passing on the benefit of excise duty from the previous tax system. So, it is difficult to assess the impact of GST on the overall taxation at this point of time, owing to which the stakeholders are adopting a ‘wait and watch’ approach,” explains Hawelia.

The GST, hence, seems to have failed its objective of being tax-neutral in the housing market. While there is a direct increase of 6-8 per cent in taxes, compared to the previous service tax regime, even if the input tax credits are passed on to the customers with the anti-profiteering clause, property prices may still increase by 1-3 per cent.

 

Why GST is not tax-neutral for housing

  • GST only replaces service tax and does not subsume other taxes such as stamp duty and registration.
  • Even with the anti-profiteering clause, it can be a tricky affair to check whether developers are passing on the benefits of input tax credit to buyers.
  • The tax difference between the service tax and GST regimes, may be too huge to be bridged with input tax credits.
  • Higher tax slabs on construction materials will escalate prices.

(The writer is CEO, Track2Realty)

 

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