(English) GST Impact on Real Estate – The Sector Overall
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Hope the last two blogs have been able to give you a detailed insight about the GST impact on real estate developers and buyers. In this blog, we will visit some aspects of the real estate sector, which will complete our overall understanding of how we can expect real estate to pan out under GST.
GST impact on real estate rentals
Under GST, the treatment of rentals is very clear. Those landlords, who are earning rental income by letting out their properties for residential use will not be taxed under GST – thus no GST on rent paid for homes. However, the GST rate on rent of commercial property will be 18%, and will need to be levied only by those who are earning over INR 20 Lakh annually. In case the landlord is unregistered due to threshold limit, then the taxable person has to pay GST on rent under reverse charge – at the standard GST rate on commercial rent.
Another important aspect to consider in the case of commercial property rentals is the availability of input tax credit for the developer. In case of a sale which is executed prior to obtaining the completion certificate or prior to first occupancy, the developer is eligible to claim ITC. However, if the developer chooses to rent out the property, the developer will not be allowed the ITC. Thus, in case of rentals, the project costs are going to get escalated. In addition, all business entities, should be able to take credit of the GST on rent paid – this means that the developer community can negotiate better for rentals. In short, rental space for commercial use could become a costly affair under GST.
GST impact on home loans
GST impact on the loan taker
Before evaluating the likely impact of GST on home loan EMI and costs, let us understand the components which are bound to be impacted under GST. The main cost of taking a home loan, is the interest payment on the principal amount. This cost will not change, as there is no GST on home loan EMI. Similarly, any stamp duty charged in connection with the documentation of the home loan, also will not change with GST, as stamp duty is not subsumed under GST.
However, the loan processing fee, which is charged by the lenders, will increase from 15% under the service tax regime, to 18% in the GST regime, which is the applicable rate for financial services. Having said that, this is generally a one-time cost and thus, its overall impact on the home loan tenure will be insignificant. Similarly other related charges, such as advocate fees, valuation charges, prepayment charges, EMI default charges, and so on, are expected to go up by 3% – which is pretty much the GST impact on home loans for the loan taker.
GST impact on the lender
Lenders – in other words, banks and financial institutions which extend loans for real estate, will be receiving ITC with respect to the services availed. In addition to this, goods purchased, which they can utilise against their GST output taxes liability, which is good news. However, as discussed earlier, the reverse charge mechanism, if applicable, will adversely affect profitability. However, the biggest challenge will be moving from a centralised registration under the previous service tax regime to a state-wise registration under GST. This will significantly increase the compliance costs of the lenders and affect their profitability.
GST impact on the real estate sector
Reduction in black money in the GST era
GST will help cut down on the cash component in construction, as inputs will now have to be sourced from registered vendors to get input tax credit. This will go a long way in reducing the black money component in real estate. Also, the GST returns process will ensure that both suppliers and recipients of goods and/or services are liable to disclose transaction details w.r.t. value, amount, GST rate etc. This will promote transparency in the ecosystem, and eligibility of credit will encourage participants to declare details, thereby minimising scope for cash dealings, which is a positive effect of GST on real estate transactions.
Increase in FDI under GST
There is likely to be a positive GST impact on investments coming in from foreign shores – benefitting the NRI community, primarily because of a seamless all-inclusive channel. The simplification of taxation is probably the most positive GST impact on investments, which will also raise the confidence of the NRI market to invest in Indian real estate.
GST applicability on FSI / TDR
Floor Space Index (FSI) / Transfer of Development Rights (TDR) – used by the developers, are rights in land. As per the GST law, not all immovable properties are excluded from the ambit of GST, such as sale of land. There is a lack of clarity on whether FSI / TDR sales are to be considered as “part of land” or not – if they are, they too will stand excluded from GST; if not, then GST will be applicable.
GST on Intellectual Property Rights
The GST law provides for tax levy on supply of goods or services, or both between related persons or distinct persons even when made without consideration. Usually in the real estate sector, many entities of same group use single logo/trademark without any consideration, which could imply the levy of GST, whereas there was no tax applicable earlier.
GST on Barter Transactions
Many barter transactions are witnessed in the real estate industry. For example, giving away of free flats in lieu of ‘development rights’. In the previous regime, barter transactions were mostly exempt from VAT, since a ‘value’ was not involved. However, under the GST law, tax will be applicable on all forms of supply such as barter, exchange, and so on, and the value of supply shall be determined in accordance with the GST Rules.
In conclusion, it can be said that a simplified tax structure is definitely going to be a boon for the real estate sector in the long run, both for developers and buyers. Not only is this going to ensure an increased tax compliance, but also more clarity in the nature of GST on real estate transactions. While GST may not be that instrumental in bringing down the prices of residential real estate over the short term, overall, it will surely seek to revive buyer and investor interest by bringing in a more transparent, simplified and accountable tax structure.
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Author: Pramit Pratim GhoshPramit, who has been with Tally since May 2012, is an integral part of the digital content team. As a member of Tally’s GST centre of excellence, he has written blogs on GST law, impact and opinions - for customer, tax practitioner and student audiences, as well as on generic themes such as - automation, accounting, inventory, business efficiency - for business owners.
Pramit Pratim Ghosh
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