What is GST?
Goods and Services Tax or GST is a destination-based tax that brings all indirect taxes under one roof. In the current tax regime, state governments tax sale of goods but not services while the central government taxes manufacturing and services but not wholesale and retail trade. With GST all indirect taxes including Excise and VAT levied by the central and state governments across the country get subsumed into a comprehensive GST to create a single market across India.
There are four different tax slabs in GST – 5%, 12%, 18% and 28%. Majority of daily consumable items have been kept under 5% tax slab while luxury items will attract 28% GST. Everything in between will be taxed at either 12% or 18%. Before we get into effect of GST, let us understand how real estate is taxed in the current tax regime
GST will be effective from July 1, 2017 and there are many things businesses and consumers want to know about the impact of its implication. Buying a property in Bangalore or any other metro is definitely a dream of many, but many of them are confusing in the choice to buy luxury villas, villa plots or under construction properties etc. So if you are the one looking to buy a property, here are some facts you must know about GST in real estate.
Lowering down the cost on the input credit will be favourable for home buyers, as the property rates will come down. When the GST will be implied, the tax will be much higher for the home buyers and there are chances that home buyers will have to suffer higher tax rates. But the benefits of these implications include lower property price as well. Here, the homebuyers must understand that the benefits will be limited to the cases where the real estate developer will pass the benefits to their customers.
Experts say that there will be two aspects of GST playing major role in the real estate sector. The price being the most discussed factors, as everyone is expecting the property rates to come down and the second is the land value subsiding in the total value of under construction properties and residential properties.
Under-construction real estate is covered under GST through works contract and classified as a service. The GST tax rate for under-construction real estate has been set at 12%. Also, it has been clarified that input tax credit will be available for developers to take advantage of and pass on the benefit to the buyers under the anti-profiteering clause of GST. However, abatement clarification has not yet been given. While service tax across states in the current service tax regime at 4.5% (with abatement) some states charge VAT in the range of 1 to 5%. With the input tax credit on construction materials available in full, the effective GST rate on real estate should be less than 12%. Compared to the current taxes, this GST rate is likely to be neutral to slightly negative depending upon the service tax and VAT rules that are prevalent across different states.
If you look at the current service tax scenario, you will find that the service tax is not applicable on the residential properties. According to the government, there will be no change in the stamp duty.At present, only the industrial and commercial properties are subject to service tax. These taxes will be replaced by Central and State GST.
Sale of properties:
Once the GST comes into action, the tax rate scenario for the sale of properties will be different. According to the GST bill, the land or a building when sold will not be treated as a supply of services and supply of goods. Under construction buildings will be an exception in such cases. Overall, selling a land or building will not be considered the supply of goods or services and tax will not be charges on these activities.
Impact on developers:
Tax is now 12% with full input tax credit available to developers on construction materials. The final bill is likely to be the same or marginally higher, varying across states as clarity on abatement rules has still not been provided. Some change in terms of changing market dynamics has already brought about a change in developers’ workings. A similar change in plans to be more customer-centric and delivery-focused to create a differentiated identity will be the most likely method developers will adopt while they will factor in the input tax credit which will reduce their construction costs and such benefits will be passed on the buyers. More details Contact Us
Impact on Renting Out
The Central GST bill states that the any lease or license, tenancy will be considered as supply of services and tax will be applicable on the same. According to the bill, renting out a place that include residential, commercial and industrial building or complex for any sort of business activities regardless of whether it is given out entirely or partly will be under the tax radar. The same will be considered as the supply of service and as per the CGST bill, tax will be applicable in such cases.
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