How the Implementation of the GST in India has made an Impact

The introduction of the Goods and Services Tax (GST) in India in 2017 caused a lot of confusion and speculation. A topic that was discussed ad nauseam was the impact of the GST implementation on the real estate sector, given how it accounts for 6-8% of this country’s economy. Considering how real estate is said to be one of the country’s most critical sectors, it is essential to discuss the impact of the Goods and Services Tax on this sector.

It is no secret that real estate is now taxed 5% while it was initially taxed at 12%. Let us see how the implementation of GST in India has affected buyers and developers.

How has GST affected Buyers?

Under the previous tax regime, buyers would be liable to pay a bunch of taxes like the Value Added Tax (VAT), Service tax, stamp duty, registration charges, and so forth.

The aforementioned taxes would vary with each state, and developers were liable to taxes like customs duty, sales tax, and more. However, a single GST rate of 12% was applied to properties that were undergoing construction until April 1st, 2019. Buyers would benefit from this. In the long-term, GST will probably help buyers if the benefit of the Input Tax Credit (ITC) goes from the developer to the buyer.

How has GST affected Developers and Builders?

Developers would face the hardship of paying taxes like VAT, excise duty, customs duty, taxes, raw materials, and service taxes on a bunch of essential services under the previous tax regime. ITC was not available for the taxes mentioned above under the previous tax structure, which meant that these charges would be added to the overall pricing.

With GST’s advent, there is a dip in the developers’ construction expenses due to the subsumption of multiple taxes and the availability of Input Tax Credit. Additionally, the implementation of GST has also led to a reduction in logistics costs.

However, developers are now forced to perform many tedious calculations to come up with the ITC to pass on to the buyers. This means that the ITC can only be passed on during the final stages.

The fact that there is barely any transparency on the ITC has caused buyers to merely wait and watch and defer their property purchases.

How has GST affected Construction Services?

Many construction services are liable to pay GST on real estate. The following are the GST rates on specific construction related services in this sector.

  • 8% on properties under construction under the Credit Linked Subsidy Scheme
  • 12% on properties under construction, excluding those that are a part of the scheme mentioned above
  • 12% on the composite supply of works contract for affordable housing
  • 12% on the composite supply of work contracts to agencies of the government or local government bodies
  • 18% on composite supply of works contract apart from the local government bodies, agencies, and affordable housing
  • 18% on the works contract other than for government bodies

How has GST affected Residential Property?

Here’s how the Goods and Services Tax has affected residential property:

  • Easy and more straight forward tax structure, leading to a higher chance of compliance from builders and developers

  • Solving the issue of passing ITC benefits to the buyer, which reduces the chances of deferment of property purchases

  • A price for the buyer that is feasible, thanks to reducing the GST tax rate to 1% on residential properties

  • Pricing residential properties reasonably due to the removal of unused Input Tax Credit from the project cost

When is GST not applicable to Real Estate?

The Goods and Services Tax on real estate does not apply to the following activities of transactions related to construction:

  • When you are selling a flat that is ready to move in
  • Reselling a property
  • Purchasing or selling land

Keep in mind that the supply of goods and services does not fall in this category, which means the GST on real estate is not applicable here.

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