Impact of GST On Real Estate

The Goods and Services Tax or GST took effect on July 1, 2017. It is a single indirect tax-structure regime. GST impacts all involved in the real estate segment in several ways.

Before you proceed further in this article you need to understand the meaning of input tax credit.

What is Input Tax Credit?
Input tax credit simply put is that when paying tax on output product/service you can subtract the output tax with the tax already paid on inputs. This way output tax gets reduced.
For example- A builder may have paid taxes on land, materials and construction in the process of constructing a property. These taxes are input tax. Tax on the completed property is output tax. But the whole output tax need not be paid. You need to subtract the input taxes already paid from the output tax. Hence output tax is reduced.

Benefits to Purchasers
GST simplifies the tax structure for purchasers. Thanks to input tax credits builders obtain increased profit margins and have to transfer the benefits of the same to purchasers. For purchasers GST makes the taxation process more transparent than before. The former found the previous taxation process very complicated.

Benefits to Developers
The GST is much simpler and easier to work with from the perspective of developers. GST has not significantly changed the taxation on major residential and commercial properties construction materials. However, there is reduced tax on transportation as well as logistics which will result in a lower overall cost. As developers can claim input tax credit it will lower their tax burden. This will result in increased profit margins.
GST is 12% of the property value in the case of under-construction properties. This excludes stamp duty and registration charges. GST makes it mandatory to developers to pass the benefit of lower tax to customers.

Completed Properties Will Cost More
Input tax credit does not apply to ready-to-move-in properties. As a result, the latter will have higher costs.

How tax is calculated under GST for under construction properties
Under construction properties will have 9% SGST (State Goods & Services Tax) and an additional 9% CGST(Central Goods & Services Tax) to make the total tax rate 18%. A land value equal to one-third of the final sales amount can be deducted which makes the final tax rate 12%.

Plans to subsume stamp duty, registration charges and property tax in the future
The state levies stamp duty as well as registration charges. Property tax is levied by the municipality. Presently the GST doesn't cover them.

Impact of GST on rent
There is no tax on rental income obtained on residential properties. In case rental income exceeds Rs 20 lakh annually in the case of properties employed for industrial or commercial uses there will be 18% tax levied. Note that property prices are mainly determined by demand and supply dynamics and taxes are not the only factor. As GST subsumes nearly a dozen indirect taxes double taxation is eliminated. The result is improved tax