+91-888-066-0000Owing to recent policy reforms in real estate space, the sector has been witnessing phenomenal growth. This growth unsurprisingly is noticed not just in Tier 1 cities, but also in Tier 2 and 3 cities and towns. Regulatory changes such as Real Estate Regulation and Development Act 2016, Real Estate Investment Trust (REIT), Goods and Service Tax (GST), ease-in FDI restrictions etc are expected to bring about note worthy changes on the functioning of realty sector.
Taxation in real estate sector has relatively ambiguous with assortment of levies such as value added tax (VAT), stamp Duty, service tax etc charged at center and state levels. This is leading to overlapping of tax bases and unvarying disputes over the actual rate of tax to be levied. Additionally, the vagueness has caused irregularities in practices followed by developers within each state. With GST implementation all multiple taxes will be replaced with a single tax, thus ending taxation disparities across India. With GST,developers can gain from free input credits on GST for goods and services purchased by them, reducing costs while passing the same benefits to buyers. GST ideally should be a clear win-win for both players!
GST – Goods and Service Tax is intended for movable properties only, while sale of completed properties, which are immovable doesn’t fall under the GST regime. Hence it is prudent to discuss the ambit of GST for real estate to best understand the impact of this particular uniform tax regime.
Transactions in real estate can primarily be classified under the following types –
- Sale of properties – Completed
- Sale of properties – Under construction
- Transfer of development rights (By landowner to developer)
- Leasing of immovable property
Sale of properties – Completed
The Model GST law is applicable on all kinds of movable goods. Since, completed properties are categorized under fixed goods, GST will not be applicable on their sale and the current taxation in the form of stamp duty to be levied to the consumer will continue. However, on the procurement side the non-creditable taxes such as VAT, service tax, excise duty etc will be replaced with a uniform GST, the rate of which is yet to be decided. Impact of this on the realty sector can be speculated in precision only upon knowing the differentials between the two tax regimes.
Sale of properties – Under construction
Although not confirmed, construction of properties will mostly likely be classified as ‘works under contract’and will be treated as ‘Supply of Services’ as per GST Model law making it a direct contender for levying under GST
Although GST is applicable on the output side, its scope of the procurement side is not fully assertive. Per GST Modal law, credit of GST paid on goods and services obtained for the construction of immovable properties will not be available, leading to litigation and denial of credits for this sector. Only time can tell its impact on the domain in context.
Transfer of development rights (By landowner to developer)
In most of residential development projects, there are barter transactions where a landowner transfers development rights to developer/s in exchange for space in the finished property. Since, Model GST law includes taxation for barter transactions, it is most likely that these category of business deals would come under the ambit of GST.
However, the valuation of such transactions would result in ambiguity, which will continue to follow the status quo irrespective of the GST implementation.
Leasing of immovable property
Taxation on leasing immovable properties will continue under GST as well, where commercial leases attract service tax while residential leases don’t.
With GST in place, lease rentals of commercial properties are likely to gain from availability of input tax credits to the owners. However, it is still not clear if credit of GST paid on procurement of goods and services would be available or not.
Spoilsport – Stamp duty & Registration Charges
One of the major setbacks of GST is the exclusion of Stamp duty levied by the state to property buyers. Dual taxation -GST by the centre and Stamp duty by the state is not a very conducive situation, since a rate hike is expected in GST upon normalization. Additionally, GST won’t subsume registration charges, like in case of Stamp duty, and it would continue.
Conclusion
With the wait for GST almost getting over, its impact on the realty sector is likely to be positively felt by property developers as a result of expected free flow of credit. However, the quantum of these benefits percolating to property buyers is unknown for the final rate is still under curtains; to add to it pricing in realty is more determined by market forces than on costing principles or taxation regime. Most things still being uncertain, GST’s ability to provide greater transparency into functioning of real estate can be taken on its face value, expecting the best off it
