How does GST impact on real estate? Know here!

It’s been almost one year since the implication of the Goods and Service Tax (GST) but people are still unaware of the advantages and disadvantages of GST and how it affects their daily lives. This article concentrates on the GST impact on real estate. So, if you are planning to buy a house in the near future, you have come to the right place. Here, you’ll get all the information you need regarding the GST impact on real estate and how the taxes collected earlier were different from GST. Also, if you are a builder or an investor here, you’ll get all the knowledge you need.

What is GST?

Goods and Service Tax (GST) is an indirect tax in India on the sale of goods and services. GST is imposed whenever there is a new step in the process of production but is refunded to every middleman involved other than the final consumer.

The goods and services are generally divided into 5 different tax slabs for the collection of tax and those five tax slabs are 0%, 5%, 12%, 18% and 28%.

The GST will cover the Central excise, service tax, VAT and other local taxes to create a stable market. GST is expected to increase GDP growth by about 2 per cent and check tax evasion.

Central GST (CGST), State GST (SGST) and Integrated GST (IGST) are the 3 types of GST that are being levied.

Taxes on the Real estate before GST   

The real estate sector previously consisted of many indirect taxes such as – Customs Duty, Central sales tax, Excise duty, service tax, entry tax, Value added tax (VAT) and stamp duty.

What is Central Sales Tax?

Central Sales tax is the tax taken on sales produced during the trade or commerce between 2 states in a country. In other words, it is the tax one must pay on the sale of goods which undergo various states before reaching the state where it is supposed to be sold.

What is Excise Duty?

This tax is taken on certain goods for their production or sale catering or on licenses on specific services and activities. Excise duty is an in-land tax. The government then receives the tax from the producer.

What is Service Tax?

Service Tax is levied by the Central government on the services that are constructed and then is offered by the developers to buyers. The minimum cost of the real estate that the property owner pay includes the cost of the construction as well as land. This service tax is imposed only on the construction component.

GST impact on real estate

Currently, GST on real estate sector is 12%. All under-construction properties will have a GST on real estate of 12 per cent. However, ready-to-move properties will not be affected by GST.

How is GST different?

Multiple taxes are replaced by GST. This is one of the biggest changes in the history of Real Estate. A developer can claim input tax credit when he has already paid the taxes for the materials required. It may seem that earlier taxes were lower than the new GST of 12% on under-construction properties but earlier, the developer was also paying taxes on input materials which cost him. Now, it will change with GST.

Although the customer will have to pay a 12% GST on real estate, the developer will be able to claim input tax credit i.e. the taxes that he has paid for the raw materials. So, in turn, effective costs will reduce. As per GST, he is bound to pass the input tax credit benefit to the customer.

So, as a customer, you may feel that you are being charged a higher tax rate but, due to input tax credit, you get some percentage back by the developer.

What if you have bought a property after the completion certificate (CC) was issued to the builder?

In such a situation, GST will not be applicable as there is no supply of goods and services. Therefore it is considered a ready to move in property.

Payment made to the constructor or the builder in full or part before the rollout of GST:

Whether you pay in part or you pay the full amount, if it is made before the rollout of GST regime, then GST would not be applicable. However, keep in mind that you will be charged applicable service tax rate of 4.5 per cent.

GST on under-construction flats, properties and commercial properties:

The actual GST rate is 18 per cent in this category. But one-third of this 18 per cent is considered as the value of land or undivided share of land supplied to the buyer of the property. Hence, due to full input tax credit, GST rate comes down to 12 per cent on under-constructed flats, properties or commercial properties.

Stamp Duty & Registration Charges

Stamp Duty & Registration charges remain unchanged. These charges collected are different in each state. Generally, Stamp duty is between 4-10% and registration charges vary from 0.5-1% of property value.

GST impact on real estate, builders and buyers.

Various indirect taxes and duties must be paid by the builder during the construction of a property. He passes on this cost to the costumes. But with the GST impact on real estate, all these taxes are now combined into one, and hence have resulted in reducing the cost of the property.  For buyers, though GST of 12 per cent is slightly higher, there is uniformity in taxation which will be of their benefit.

Impact of GST on Home loans

We’ll first have to understand the components that will impact the rates under GST. And before evaluating the impacts of GST on home loans. The interest on the paid money is the actual cost of home loans. This cost will not change, as there is no GST or service tax on it.

However, there are various type of charges that are imposed by the lenders on home loans. First is the processing fee that is paid at the time of taking a home loan. Earlier, it was 15 percent but it will go up by 3 percent under the GST, to 18 percent. This is a onetime cost and the overall GST impact on real estate and on home loan tenure is insignificant.

When a home loan is obtained, interest is paid on the principal amount. The interest remitted on the principal amount is considered the cost of the loan. Besides the loan, the borrower pays the advocate charges, property valuation charges, and processing fee. Earlier, the home loan service was taxed at 15% under the previous property tax regime. Currently, it is taxed at 18% and thus, the loan will be expensive by 3%.

A Brief:

The earlier complicated tax structure is now simplified.

Input tax credits will help the developers by reducing costs.

Buyers will benefit from the input tax credit, by the way of paying GST on the lesser amount.

For all types of properties, the stamp duty will still be applicable and will remain unchanged.