GST Impact on Real Estate – Developers and Builders

Pramit Pratim Ghosh |Updated on: August 24, 2021

Introduction

The real estate sector is one of the most pivotal sectors of the Indian economy, ranked second only to agriculture. It has an average contribution of 5% – 6% to the Indian GDP, stimulating demand for more than 250 ancillary industries, and playing a vital role in generating employment across the nation. It has also been one of the prime areas of investments; having seen a substantial growth of 22% in the private equity space, and close to 9% in investments for residential properties in 2016.

The sector of late, has indeed been subject to a sea of changes. Demonetization was the first wave to hit the real estate shores last year, closely followed by the latest Real Estate and Regulation Act (RERA). RERA aims to address the issue of non-transparency by affixing a certain level of accountability on real estate builders and brokers, which is unprecedented in the history of the Indian property sector. And now, with GST ruling the roost for over a month, the sector is undergoing major transformations. Whether one is a developer, buyer, investor, financier or an intermediary, there will be a significant impact of GST on real estate stakeholders in several ways.

In our first blog in this series, let us understand the impact of GST on Indian real estate developers.

Impact of GST on real estate developers

Elimination of cascading taxes

Under the previous tax regime, a real estate developer was subject to customs duty, excise duty, VAT and entry taxes on the construction material cost. In addition, on the services used, such as - labour charges, architect fees, approval charges, legal fees, –and so on, developers paid service tax of 15%. Real estate developers thus grappled with the challenges of multiple-taxation, and the cumulative burden eventually passed on to the buyer.

Under GST, these are how the rates look like for various construction materials:

Thus, under GST, while there may not have been a significant change in the overall tax rates, but the elimination of tax-on-tax, and the seamless availability of input tax credit is bound to bring down the final cost of construction. This will also decrease the price of housing units. This would in turn boost real estate sales, bring in more liquidity in the market, and ultimately improve profit margins - a positive impact of GST on real estate developers.

Lower costs of logistics

A key positive GST impact on real estate developers is the effective dissolution of state boundaries under GST. Previously, developers engaged in construction of property in other states would invariably face the brunt of compliance costs. This is since the central sales tax applicable for interstate sales, was not available as input tax credit. This would lead to increase of costs for the developer, forcing him to increase the price for his buyer, thus impacting his competitiveness. As a result, most developers would tend to avoid CST by setting up warehouses across states, reducing efficiency and increase costs as well.

Under GST, however, the need for multiple warehouses will go down greatly, which were being set up more for compliance rather than for operational efficiencies. This will also imply lower transportation and logistics costs.

Simplified Works Contract

One of the key components of real estate operations is works contract. In the previous regime, works contract had a very complicated treatment, considered as a mixture of goods and services, both service tax and VAT was applicable on it. Given that, different states had different VAT rates, the complication was even more. On the top, if the works contract involved manufacture of a new product, excise would also be applicable.

Under GST, the treatment of works contract has been much simplified, now considered purely as a service. Also, the GST rate for works contract has been fixed at 18%. This not only eliminates the dual treatment of works contract, but also makes life easier for a contractor and sub-contractor by subsuming all the previously applicable taxes, again a positive GST impact on real estate developers.

Reverse charges on supplies

Under the service tax regime, a developer was required to pay taxes on certain services that were availed by him, such as, services of goods transport agencies, advocate firms, legal services, security services, and so on. On certain services, the developer had to pay 100% of the service tax, whereas, on other services, he only had to pay a certain percentage of it, while the balance was paid by the provider of services. The service tax thus emerging under RCM, had to be paid by way of cash or bank payment, and was not dischargeable by using tax credit available to the developer. However the service tax paid under the RCM was available as input tax credit by the developer.

In the new regime, while the nature of services which fall under reverse charge remain more or less the same, a major change has been introduced. Under the reverse charge mechanism in GST, a person who is GST registered, has to pay GST on all the supplies procured from a person who is not GST registered.

Earlier, when a developer availed the services of any professional, like architects or structural engineers, who were not registered under the service tax laws, there was no service tax liability on either of these two parties. This is bound to have a negative GST impact on real estate developers, due to the dual effect of the levy of GST on the services availed from unregistered person. In addition to this, it was required to discharge the reverse tax on goods received from unregistered suppliers. However, the GST council has announced a relief with respect to supplies of goods and services: the reverse charge mechanism will not apply in case the value of the supplies does not exceed INR 5,000 in a day.

Availability of ITC on under-construction projects

For projects that are partially constructed and partially sold, both buyers and developers would have paid taxes under the previous regime, on EMIs and input costs until 1^st July. Post 1^st July, buyers will pay GST at 12% on the balance payments to the developers, and developers will also get input tax credit on construction material procured.

In such a situation, the stage of completion becomes important to ascertain the GST impact on real estate developers. Thus, if for a project, the buyer has paid 90% to 95% of the price in pre-GST, the GST will be applicable only on the remaining 5% to 10% amount. After July 1st, any invoice issued by the developer will attract 12% GST. Thus, in ongoing projects where work is towards the beginning, will lead to greater input tax credit for the developer compared to the ones which are nearing completion.

Conclusion

On the whole, there seems to be a positive impact of GST on real estate developers. But a complete assessment of the sector can be made after understanding the impact on other aspects such as, real estate buyers, loans, rentals and the sector in general. Watch this space for our upcoming blog on impact of GST on real estate buying.