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The Goods and Services Tax (GST), a revolutionary tax reform that was rolled out on July 1, 2017, has effectively replaced multiple taxes like VAT, central excise duty, commercial tax, service tax, octroi, etc. It has made India a ‘tax-neutral’ nation and while it evoked a response best described as ‘mixed’ from real estate buyers, most of them are in favour of it.
This is natural, as the unitary tax compliance system has simplified the home buying process and with the passage of Input Tax Credit (ITC), there may not be a significant additional burden to buying a home. Home buyers in the affordable housing segment, specifically, homes of up to 60 sq metres carpet area in size, have benefited significantly from the reduction of GST by four per cent (from 12 per cent to eight per cent).
However, even almost a year after GST’s implementation, the only real clarity that exists for property buyers is on the prevailing GST rate of 12 per cent, on under-construction projects. There is still confusion about the amount of rebate that a prospective home buyer is entitled to, on the back of the pass-over of ITC. The confusion is not only about the percentage of ITC but also on the mode and tranche of the rebate. On their part, developers are stating that they have to do multiple calculations, to arrive at ITC and will pass it on, only during the final tranches. With this lack of transparency on ITC, home buyers are understandably upset, because as of now, their overall payment has increased.
GST on ready-to-move vs under-construction properties
On the one hand, ready-to-move properties, which have been issued completion certificates, are out of the GST ambit and attract no tax from home buyers. On the other hand, under-construction properties attract 12 per cent GST, with full input tax credit (ITC). This is causing home buyers to abstain from under-construction properties, which was earlier the more attractive one, due to the cost arbitrage developers offered on them.
Also, the benefits of ready-to-move-in property buyers include immediate possession and freedom from stress, with regard to completion risk and the uncertainty of construction-linked home loan EMIs.
Ongoing challenges in the implementation of GST
Real estate stakeholders still face considerable challenges, in the metamorphosis period from the pre-GST regime to the post-GST era. These include:
- Complex tax slabs.
- Hiccups in the deployment of supporting IT infrastructure.
- Confusion about the integration of Input Tax Credit (ITC).
- Various blurred components of GST such as abatement for land values and anti-profiteering provisions.
The lack of clarity on the rules and regulations under the anti-profiteering clause, which was incorporated to pass on the benefits of ITC to end-users, is a particularly prominent pain-point with GST, as of now.
GST’s impact on property pricing and transparency
Although it was anticipated that GST would reduce property prices pan-India, we have not seen such a significant impact on the ground. If the stamp duty and registration fees would be subsumed under the GST regime, we would definitely see the overall cost of property purchases coming down. GST is definitely reducing developers’ construction costs, by negating double or triple taxation to a more moderate level, through input tax credit. While there are no significant variations in the overall taxes, GST has certainly eliminated the tax-on-tax system. Also, shady transactions are being minimised considerably, bringing in transparency and accountability into the sector.
However, end-users have not received a consummate benefit because of the inherent ineffectiveness of the anti-profiteering provisions. They will only benefit, if the base property prices are reduced and the developers pass on the tax credits to their customers. While the tax-on-tax has been eliminated with the advent of GST, the overall outgo from home buyers’ pockets seems to have increased, considering that even after passing on of ITC, they may have to pay three to four per cent more than in the earlier service tax + VAT regime. However, shady transactions are definitely reducing to a considerable extent and the cause of bringing more transparency and accountability into the sector is served. Additionally, the input tax credit is a boon to developers, as it aids in bringing down the construction cost.
The road ahead
In line with its ‘One Nation, One Market, One Tax’ philosophy, the GST reform will, in all probability, benefit the Indian economy in the long run. As the realty sector becomes more streamlined on the back of GST and other landmark reforms such as RERA, investor and consumer sentiments will become more positive and further strengthen the system in the future.
(The writer is chairman, ANAROCK Property Consultants)