Albert Einstein said that the hardest thing to understand in the world is income tax. At present, there are several taxes levied at the state and central level. Such a system has led to rise in the final prices of the goods and services.
The government is all set to roll out the Goods and Service Tax (GST) Act from July 1, 2017. GST is a single tax rate that will replace all the existing indirect taxes by the State and the Central government. A single tax rate is expected to bring uniformity in the tax system.
The realty sector is particularly excited about this; especially, after the slowdown in the sector post demonetisation. The GST on under construction property will be 12%.
Here’s all you need to know about GST and the real estate sector:
The existing tax rates
At present, service tax and Value Added Tax (VAT) is levied on under construction property. For properties costing more than Rs.1 crore, you pay a service tax of 4.5% on the agreement value. For those costing less than Rs.1 crore, the tax rate is 3.75%. Under construction properties also attract VAT. The VAT rate varies across states. Maharashtra levies 1% VAT on the agreement value. The VAT rate in Karnataka is 5.5%. States like Tamil Nadu and West Bengal do not levy VAT. In addition to these taxes, you pay stamp duty as well as the registration charges while buying a property.
- Tax rate under GST
The 12% GST will do away with the existing service tax and VAT. However, you will still have to pay the stamp duty and registration charges. On the surface, the new tax rate may be perceived as a higher tax burden for the realty sector. However, the tax incidence in actuality is quite lower. This is because of the Input Tax Credit (ITC) that the traders and manufacturers claim.
- Input Tax Credit (ITC)
Traders and manufacturers pay tax on the raw material that they use for their product or service. They again pay tax on the final output that they offer. ITC allows them to claim a deduction from the tax on the output. The tax paid on the input can be reduced from the tax paid on the output. Currently, real estate builders get no ITC on the tax paid on fittings, steel, and cement. Under GST, this will change. Post, GST, builders will get the benefit of ITC.
Developers hopes on GST
Real estate was one of the worst hit sectors due to the demonetisation policy. GST is expected to bring some respite to the real estate sector. Since GST allows ITC, the property prices are likely to come down. Several developers are of the opinion that GST will boost investments in sector.
With reduced prices, the Indian real estate market will become more attractive for Non-Resident Indians (NRIs). GST is likely to invite more foreign investments into the realty sector. This is further supported by the findings of property consultant Knight Frank and industry bodies such as the Federation of Indian Chambers of Commerce and Industry (FICCI) and National Real Estate Development Council (NAREDCO). According to 64% of the industry leaders, residential sales are likely to improve in the next 6 months after GST implementation.
Materials such as steel and cement are important inputs for the construction business. These inputs are most likely to be cheaper due to the reduced tax rates under GST. For instance, coal is used in the making of steel. The current tax incidence on coal is 11.69%. Under GST, coal will be taxed at 5%. Thus, GST is likely to bring down the cost of raw materials. This could contribute to the reduction in the final property prices.
Property developers in India are also hopeful of a transparent realty sector. Many believe that a single tax rate is likely to bring more clarity to the sector.
To sum it up
GST is said to be India’s biggest tax reform. Developers across the country are hopeful that this reform will boost investments into the realty sector.
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