Lower tax burden for home buyers

The levy of the Goods and Services Tax (GST) on July 1 is expected to be a game-changing reform in the Indian property industry. The sector has already seen changes in the wake of demonetization and the Real Estate (Regulation and Development) Act.

People are expecting some relief in property prices as they believe developers will pass on the benefit of the cut in input costs to home buyers. The number of existing taxes is also expected to be reduced and this will augur well for the industry.

The real estate industry will be taxed at 12 per cent under the GST regime. Currently, a homebuyer has to pay several indirect taxes, including excise duty, value-added tax and service tax, which amounts to a tax outgo of about 11 per cent, excluding stamp duty. Under the new regime, all indirect taxes will be subsumed and a buyer will have to pay a uniform 12 per cent tax on the purchase of real estate, except stamp duty and registration charges. This is true for under construction properties but not on ready-to-move-in apartments.

 The GST Council has also allowed for input tax credit (ITC) on raw materials and services used for construction activity. This will play a critical role in determining the final cost implications of GST on real estate prices.  The government has told developers to pass on any benefits they avail under the new tax regime to homebuyers.

 "The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/installments ... It is advised to all builders/construction companies that in the flats under construction, they should not ask customers to pay a higher tax rate on installments to be received after imposition of GST," a government statement said.

"Most analysts in the real estate sector are of the view that the price of properties will fall after the GST is introduced. The GST rate applicable to houses and apartments is fixed at 12 per cent. However, the builder will get input credit for the GST paid on purchase of cement, steel and other building materials. Currently, the taxes on inputs are more than 12 per cent of the final price. Hence, with the input credit being available, the actual burden of taxation will come down drastically than what it was prior to July 1," says H.P. Ranina, a practising lawyer specialising in tax and exchange management laws of India.

The service tax of 4.5 per cent which home buyers had to pay also cannot be levied after July 1. "The real estate sector is happy with the new GST regime and it will lead to a lower tax burden for the final consumer which will help in boosting the sales of apartments, especially in the affordable housing sector," adds Ranina.

Although GST is designed to encourage transparency and ease of doing business in the realty sector, whether it will bring down property prices or not is still debatable.

Even though GST may not bring down prices of residential real estate in the short term, it will definitely be a sentiment booster for property buyers. The industry's perception will improve on the back of a simplified tax structure and accountability at every stage.

Says T.S. Asok, managing director of ArtechRealtors: "A simpler, uniform and single tax structure will make the industry a winner with both buyers as well as builders sharing the advantages. The proposed 12 per cent tax can be offset by the input tax credit that can be availed. The Finance Minister said property buyers stand to gain with GST. This is the biggest assurance for the industry. Transparency and ease of transaction coupled with accountability will be the advantage for property buyers, especially NRIs, who can now easily distinguish genuine players." The levy of GST is also expected to improve developers' profit margins.

"In the previous tax regime, developers grappled with the challenge of multiple taxation. On various construction materials they purchased, builder paid customs duty, central sales tax, excise duty, entry tax, etc., thus creating various instances of multiple taxation. The cumulative burden eventually got passed on to the buyer. GST will eliminate all other taxes and developers can benefit from being able to claim input tax credit," according to Anuj Puri, chairman of Anarock Property Consultants.

Source: Khaleej Times