Real Estate industry is a significant part of India’s economy. About six to eight percent of India’s GDP is through real estate. Thirteen percent of India’s GDP is estimated to come from the real estate sector by 2025. The expected growth of this industry by the year 2040 is about Rs. 65,000 crore. Currently, it is at Rs. 12,000 crores. These figures show how vital the real estate sector is not only for the citizens but also for the country’s economy.
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There was a higher rate of Goods and Service tax towards the real estate sector in 2017. It made a significant effect of GST on real estate and on all sections of this sector, which led to a slow down to some extent. To help this sector get back to growth, the GST council reviewed the tax slabs and later made necessary changes to benefit the real estate industry.
GST Rates and Changes
The real estate industry is divided into two segments. Goods and Services. The construction material that is bought and sold comes under the Goods segment. The construction, labor, transport, and other services come under the services segment. The taxes applied to both goods and services contribute to the final cost of the property. There are different rates applicable at different levels.
The total cost of the GST of a fully constructed property could be calculated by adding SGST and CGST. Tax levied could be 9% CGST + 9% SGST = 18% GST. This could differ depending on the stage of production or supply of goods and services, but taxes of goods and services fall on the final consumer. GST rates on real estate for Goods may vary depending on which goods are being used.
List of GST rates applicable to some goods that are used in real estate.
- Sand used in construction – 5%
- Building Bricks – 5%
- Roofing Tiles – 5%
- Marble Rubble/Crude Granite – 5%
- Ash Blocks – 5%
- Granite blocks/Marble – 12%
- Glass for construction purposes – 18%
- Tiles/Refractory Bricks – 18%
- Structural building components – 18%
- Slag cement/ Portland Cement – 28%
Similarly, there are various tax rates applicable to different services used in real estate. Under-construction properties, which come under the Credit linked subsidy scheme get 8% GST. There is a 12% GST levied on under-construction properties excluding those which are under credit-linked subsidy scheme, Composite supply of contract for works of affordable housing, and government agencies.
The GST for the supply of work contracts for Non-government agencies or affordable housing is 18%. There is a lot of unregulated services that are in the real estate sector. Construction workers, vehicles, staff, etc. are services that are unregulated and hence cannot be taxed.
Impact on the Real Estate Sector
There is a complex mechanism in which the real estate sector works. A lot of suppliers are still not registered under GST and continue to do business. In this situation, reaching an accurate conclusion about the real impact of GST becomes difficult. But as there has been pressure on unregistered suppliers to get registered and become GST compliant from the registered consumer had made some difference.
It is mainly because of the Reverse Charge Mechanism; a more significant number of suppliers had to come under the fold of GST. Businesses and services which are out of the GST regime cannot be considered to calculate the direct impact of GST on real estate. However, an indirect effect did happen on the unregulated suppliers on a smaller scale. There is a lot of unregulated supply of goods and services, which is prevalent in this industry; hence it is tricky to understand the direct impact of Goods and Service Tax on the whole real estate sector.
Benefits and Negative Impact
- The most benefited segment of real estate is residential properties. Properties that were rented for residential purposes were exempted from GST. 18% GST is implemented on maintenance charges exceeding Rs.7500 per month. These factors created greater popularity of rented residential properties.
- Fully constructed properties had a greater benefit because they were completely exempted from tax.
- Transparency and accountability increased because of the implementation of GST.
- With just 1% GST on the economic segment properties, residential units became affordable.
- There was greater ease for property owners as the tax liability threshold limit for commercial rental properties increased to Rs. 20 lakhs from the earlier threshold of Rs. 10 lakhs.
- As there was an exemption of tax on fully constructed properties, buyer interest increased in this segment to some extent.
- There was a negative impact on semi-constructed or properties that were under construction as there was a 5% tax levied.
- There was slow growth in sales of under-construction properties because of the delays that happened from developers in getting GST compliant.
- The removal of ITC benefits had a negative impact overall.
- The impression of GST being unfair among buyers was because of Reverse Charge Mechanism(RCM). Because under RCM, a registered individual will have added taxes levied if he obtains services or goods from an individual who is not registered under GST.
- There was an added burden to the buyer with the exemption of Stamp Duty and Registration Charges.
- Another minor negative impact is that a developer is levied with GST when he takes any legal services or receives services from the government regarding GST.
- The developer cannot adjust the tax payable with Input credit against RCM, and it has to be paid as bank payments or in cash.
2019 was a difficult period for the Indian economy, with retail inflation jumping to three years high and GDP growth sinking to a six-year low. New launches of residential units decreased by 14% on a year-on-year basis across the top seven cities. Bengaluru and Mumbai contributed more than 60% of the overall launches, while affordable and mid segments accounted for 55% of new launches. Changes are being made to Goods and Service tax structure to tackle the slumping GDP.
The government addressed this through a series of policy reforms such as setting up distress funds, reduction of GST on real estate, and reduction of interest rates to help developers complete unfinished residential real estate projects. The developers are focusing on the delivery of already launched projects. It will bring in much-needed support for the real estate sector. There’s a hope of a collective positive impact on the real estate industry through these actions.