Goods and Services tax: The impact of GS Ton home buyers
The real estate sector will come under the ambit of GST. However, as of now, there is lack of clarity on aspects such as whether the GST rate will remain at par with current taxes and whether affordable or lowcost housing will remain out of GST’s ambit
NEWDELHI: The biggest reform in the indirect tax regime is set to get implemented very soon. Instead of different types of taxes—central, state, local and so on—soon there will be only one tax: the Goods and Services Tax (GST). Like any other sector, real estate will also come under the am bit of G ST. However, as of now, there is lack of clarity on various aspects such as whether the rate of GST will remain at par with current applicable taxes and whether affordable or low-cost housing will remain out of the GST’s ambit. Read on to know what impact GST will have on the real estate sector in India.
When you buy an under- construction house, service taxis levied on a certain percentage of the total value of the property, which is considered the cost of construction. Cost of land is excluded from service tax. To do this, income tax provisions allow abatement to the tune of 75% on under-construction properties costing less than ₹1 crore; hence, service tax is calculated on 25% of the gross value. And, 70% abatement is allowed for properties costing morethan₹1 crore: service tax is levied on 30% of the value.
Given that service tax of 15% is charged only on the construction cost, the effective rate on the entire value of a property costing below₹1 crore is 3.75%(i.e., 15%* 25% of the property value), and for a property above ₹1 crore, the effective rate is 4.5%(15%*30% of the property value). Thus, if you buy a property at ₹80 lakh, you will have to pay ₹3 lakh (3.75% of ₹80 lakh) as service tax. And, if the property was ₹1.6 crore, service tax would be ₹7.2 lakh (4.5% of ₹1.6 crore). Once GST gets implemented ,“Payment of service tax on the properties under construction does not arise. It will be replaced with GST,” said Kunal Wadhwa, partner-indirect taxes, PwC.
Besides that ,“Existing abatements under the service tax laws are also tobe done away with post implementation of GST,” added Wadhwa. So, it is likely that tax will be charged on the actual construction value.
However, the concern is whether the GST rate would be higher than the prevailing service tax rate or lower.
“It is expected to remain around 12% or lower than 15% (the current applicable service tax rate). It will not be on the higher side at around 18%,” said Ab his he kRastogi, part ner, Khaitan& Co. If the G ST rate remains on the lower side, it will bring down the overall cost of houses.
Some states like Haryana and Delhi also charge value added tax (VAT) on under-construction properties, which is again borne by a homebuyer. However, once GST gets implemented “the current composition schemes for developers under VAT laws of respective states would come to an end,” said Naveen Wadhwa, deputy general manager, Tax- mann.com. VAT is a state subject and varies between 1% and 5% of the property value. However, “There is a lot of litigation going forward on this account,” said Nangia. There are many contentious issues for both developers and home buyers regarding VAT. Some cases have also reached the apex court. Once G ST gets implemented“it will simplify tax structure and reduce the scope for litigation, however this may increase the cost of real estate in states that never had VAT.”
A homebuyer has to pay stamp duty to get the property regis- tered. Even after GST, “Stamp duty will continue, as GST will not subsume stamp duty levied by government,” said Wadhwa.
Stamp duty is calculated as a percentage of the agreed value of the property, or the circle rate (the minimum price on which a property can be transacted, which is decided by the government), whichever is greater.
In addition to stamp duty, typically 1% of the value of a property is charged as registration fee for registration of property documents( sale deed ). In some states, if a property is bought in the name of a woman, the stamp duty levied is lower. For instance, in Delhi, properties registered in the name of women attract 4% stamp duty, compared to 6% otherwise. However, in case of joint ownership, where the property is bought jointly in the name of a man and a woman, buyers have to pay stamp duty of 5%, in case of Delhi.
In some states, stamp duty also depends on the region in which a sale deed is executed. For instance, in Haryana a man is required to pay 8% stamp duty in urban areas and 6% in rural areas, while women have to pay 6% in urban areas and 4% in rural areas.
“The Task Force on Goods and Services Tax recommended in the Thirteen th Finance Commission that real estate sector should be integrated into the G ST framework by subsuming the stamp duty on immovable properties levied by the states, to facilitate input credit and eliminate the cascading effect,” said Nangia.
But “due to political and economic considerations, stamp duty—which is a good contributor of revenue to state government—is not subsumed in the GST framework for the time being,” added Nangia.
As of now, taxes and duties can increase the cost of property by 15-18% for homebuyers. After G ST gets implemented, whether the cost of houses will come down or increase, will depend on the rate at which GS Tis charged and whether there will be any abatement or not.
AFTER GST GETS IMPLEMENTED, WHETHER THE COST OF HOUSES WILL COME DOWN OR INCREASE, WILL DEPEND ON THE RATE AT WHICH GST IS CHARGED
Some states like Haryana and Delhi also charge value added taxon underconstruction properties, which is again borne by a homebuyer