GST impact on real estate: Affordable housing may get a boost with segment turning attractive

With the implementation of goods and services tax (GST) from 1 July, the numerous sectors in the Indian market are to be affected. Real estate is one among them. GST has brought all indirect taxes (service tax, excise duty and value added tax which apply to the procurement of goods and services during construction) under one unified tax structure; leading to a scenario where there will only remain the direct taxes (capital gains tax and wealth tax), stamp duty and GST for all property-related transactions.

The Centre has eased off the biggest challenge under GST in real estate that was posing as a hurdle for developers. By allowing deduction of land value equivalent to one-third of total amount charged by the developer it is making sure that the developer passes on the input tax benefits to customers.

The Centre has also hiked GST rate for the sector to 18 percent from 12 percent decided upon earlier. And the new rate of 18 percent would now be charged on two-thirds of the under-construction property value, which will turn around to be the same as 12 percent on the entire value of the property that was announced earlier. The only catch is that states also come out with a similar notification.

Moreover, with regards to GST, there are a couple of aspects that need consideration,such as:

1) The incorporation of a tax credit system will require all parties within the value chain to be under the GST net. Several sources of material such as river sand etc. are not from organised sources.

2) The composition scheme could be retained as an option, but only to providers of materials; it will need being withdrawn from developers.

3) The tax audit and quality control protocols will also need considerable changes to ensure that advantages of low levies in certain segments and materials are not misused in an inappropriate segment, such as a developer claiming higher credit for a material not used in construction, but which is difficult to detect once the unit has been constructed.

Also, if the transition is to be effective, then the systems of GST Suvidha Providers (GSP) have to be validated thoroughly to ensure compliance and their confidence strengthened, so that they are clearly enabled to handle the transition related issues, says P Venkatesh, Director, Platforms and Solutions, Maveric Systems.

Thus GST alone cannot solve real estate market affliction – both for the buyer or the developer. Broader framework of policies and resources will be just as important to leverage the opportunity posed by GST.