Impact of GST on the Indian Real Estate Sector - GST on Real Estate

November 16, 2023 in Knowledge Base

Artistic ImpressionImpact of GST on the Indian Real Estate Sector - GST on Real Estate

What is the impact of GST on the Real Estate Sector?

April 1st, 2017 has been recorded as a pivotal day in the history of Indian taxation, paving the rollout for GST (Goods and Service Tax) and making it the single largest tax reform in India. It has replaced all existing taxes - VAT, Sales Tax, Excise Duty, Customs Duty, Central Sales Tax and Octroi. Some goods were also taxed differently based on whether they moved inter-state or intra-state. With the introduction of GST, there is now a single levy on goods, and all the taxes mentioned above have gone away.

Real estate sector is one of the most crucial sectors of the Indian economy. It plays a vital role in employment generation in India. It ranks second just behind agriculture. Thereby, India is now way more attractive to both global and Indian investors because of the increased consolidation and transparency - the launch of GST (Goods and Service Tax) and REIT (Real Estate Investment Trusts) this year – which has further boosted their appetites for getting a piece of the Indian real estate pie.

Under the current tax laws, VAT and Service tax is charged by different contractors, while excise duty, entry tax and octroi are paid on the procurements. GST law will increase the margin in the hands of contractor/developer by removing all the taxes mentioned above. Now whether this benefit gets passed on to the end-consumer is unsure, as pricing of real estate is driven by market forces more, than on costing principles.

The actual GST rate on under-construction properties is 18%. However, the effective tax on such properties would be 12% as under the new regime.

“The biggest game-changer 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 the value addition at each stage. This means that the end-consumer will only bear the GST charged by the last dealer in the supply chain, with set-off benefits at all the earlier stages.” according to Anuj Puri, the chairman of Anarock Property Consultants.

Therefore, the benefits of investing in ‘under-construction properties’ will outweigh the benefits of investing in ‘ready-to-move-in homes’ under the GST regime.

While the rental income from residential properties is exempted, people with earnings of Rs.20 lakh annually who have given their premises on rent for either commercial or industrial purposes, will be charged a rent of 18%.

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