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July 27, 2017

GST Implication On Real Estate Sector


If you’re a resident of India then you must be aware of new taxation regime. In India GST (Goods and Service Tax) was successfully rolled out on 1st of July 2017.

What exactly is GST?

Basically, GST is an indirect taxation which is applied throughout the country to replace the obsolete and ambiguous taxation levied by the state and central government. With the introduction of GST taxation, the government is trying to transform India into a country where common people can pay much less and simpler tax.

Effects on Real Estate Sector

Real estate sector is one of the most volatile sectors of the Indian economy. It provides an insane amount of cash flow which further contributes to the GDP growth of a country. Last year only, real estate sector has contributed over more than 22% in overall GDP than its previous year.

In real estate market, GST has indeed provided a much-needed boost to the economy. For example, if you’re a buyer, seller, financier, investor, or even developed you have to pay some kind of GST according to your role in the business end. But one thing you don’t have to worry about is the excessive indirect tax. The introduction of GST, makes all transaction are much transparent and simple. Also now chance of getting duped by a fraud is minimum since buyers can now pay input tax credit instead of paying the whole lump sum amount for unfinished construction.(Input tax credit is a tax credit given for each stage completion of the property to the registered builder of the plot. )

GST norms have already started to bore results, now businessmen have to maintain a strict routine of issues invoices which will be audited at the end of each financial year. This is done to make the accounting easy and also make all business transaction transparent, which will further build trust between the buyer and the realtor.

According to Edelweiss Securities, as this is just the beginning of the implementation phase, most likely prices are going to fall down a bit but the silver lining is that this will attract more buyers and investors in the project.

Buyer’s perspective

Before the GST implementation, all the taxation excluding hidden charges, indirect costs, etc is the deal breaker for most of the customers.

For an instance, if you’re a buyer and wanted a to buy a property on near a busy zone, then you have to pay service tax, tax based on importance of the location of the property, VAT, registration duty, and even you have to pay tax on the stage of completion of the building.

And, If you’re buying a fully constructed building you have pay stamp duty and registration fees. But here is also a tax lag. Different states have different rules and figures for stamp duty, VAT and registration fees. Furthermore, Service tax was decided by central government and was applied on the construction of the property.

So as you can see all tax deduction and calculations were so complex and ambiguous before GST reforms.  But from this years onwards all unfinished properties were charged at 12% of the total property value and for all the completed construction buyer doesn’t have to give any kind of indirect tax. Well, obviously these taxations were excluded of registration and stamp duty fees, which still varies over different states in our country.

Also, GST taxation makes it much more simple by charging the taxes over the total worth of the property. In earlier tax regime, service tax and VAT were accounted for over more than 9% of the overall purchase price of the property. But after GST implementation, developer have to pass on all the tax benefits to the buyers.

Developers perspective

Developers could enjoy the fact that the tax spent on the raw material of the construction is lesser than before but they have to accept the price reduction due to the new tax implementation. Earlier developers were charged heavily on entry charges, VAT, and Central Excise Duty. Also, they have to pay extra taxes for all kinds of other essential services like legal charges, labor charges, import charges, consultation fees, approval charges, regulation fees, etc. Due to these extra taxes generally, the value of the property goes up, which further buyers have to shell out from their pockets. After GST tax implementation, all the additional costs during construction were reduced to the minimum, also transportation and logistics costs were also reduced.

Finally, I think impacts of GST on real estate sector is tilting towards the positive side. Let’s see what future holds for prospective buyers. Do let us know in the comment below about your views regarding this change.