Those who are earning a rental income by letting out their properties for residential use will not be taxed under the GST. However, those who have given their premises on rent to be used for commercial or industrial purposes will have to pay an 18 per cent tax in case they are earning over Rs 20 lakh annually.
"Rental income received from a residential house is exempt. But, if you have given your unit to commercial enterprise, it is taxable if you are getting more than Rs 20 lakh as rent," said Revenue Secretary Hasmukh Adhia.
GST in India
The Rajya Sabha had on August 3 and the Lok Sabha on August 8 unanimously approved the Bill to enable the rollout of GST, arguably the biggest tax reform in India in recent times. The approvals have paved the way for implementing the indirect tax regime within the Union government's revised deadline of April 1, 2017.
The Goods and Services Tax (GST) Council on November 3 set the rates for the new tax regime. These rates would range from 5 to 28 percent, with 12 percent and 18 percent as standard rates. While things of mass consumption would be taxed at the rate of five per cent, luxury would be taxed at 28 percent.
Finance Minister Arun Jaitley had on August 3 tabled the Goods & Services Tax (GST) Constitutional Amendment Bill in the Rajya Sabha, and initiated a five-hour debate on the landmark tax reform. The proposed indirect tax regime, which is likely to subsume 17 indirect taxes upon implementation, will remove the disparity in the taxation structure across the country and bring one uniform tax rate.
How will GST impact real estate?
The real estate sector is estimated to account for about five per cent of India's gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from 2015.
However, the sector faces issues in terms of macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multiple indirect tax levies, such as VAT, service tax, excise, stamp duty and registration fees.
With the launch of GST 'how it works' might already be on your mind. Since the GST is to subsume multiple indirect taxes, it will simplify tax compliance and minimise the scope for double taxation. So, there is clear reason for home buyers to cheer, even if they have to pay slightly more in case the standard GST rate is high.
On how GST will impact the real estate sector, Ankur Dhawan, Chief Business Officer (Resale), PropTiger.com, says: "GST itself is expected to add about two per cent to India's gross domestic product (GDP). That is a substantial boost to the economy. If the economy does well, obviously, there will be more demand for real estate, and it will be a boost for the sector."
Why a slightly higher GST rate might be acceptable to buyers
Since buyers are not liable to pay any indirect tax for the purchase of ready-to-move-in properties, the impact of GST on buyers of resale properties is likely to be very little. In the case of under-construction property transactions, buyers have to pay value-added tax (VAT) and service tax. While VAT is a state levy and its rate differs from one state to another, service tax is a central tax charged at 15 per cent. Overall, the current taxes on home purchase are not low and involve mind-boggling complexities.
Most buyers of under-construction properties take home loans to fund their purchase and the whole mathematics involved in the home loan process is quite baffling, too. In most cases, buyers do not carry out a detailed study of the various taxes that they have to additionally pay and they make their investment plans based only on the value of the property.
In the case of VAT, for example, there is little clarity on what amount is paid at which level, and what part of it is passed on by the developer to the buyer. Often, for want of more clarity on the VAT rate in his state – if at all the state is imposing VAT on real estate – a buyer has to rely on the clauses mentioned in his sale agreement with the developer.
Unfortunately, no amount of research helps the buyer know the right rate? Lengthy government documents are mostly interpretative in nature and if you are not a professional chartered accountant, you might get lost in the study, and yet get a little success. On the other hand, if there is a clear uniform rate for one tax that includes everything that they need to pay in taxes to authorities, the whole payment process would become very convenient for the buyer. In such a case, even a higher rate would be more acceptable to him than a lack of clarity.
Why will developers love GST?
Since the GST is actually expected to bring down the project cost for developers, this would mean homes would, in fact, become cheaper.
There are many taxes and duties that a developer pays on the procurement side, such as Customs duty, Central Sales Tax, excise duty, entry tax, etc. These are subsequently passed on to the final pricing of the units and, thereby, to the buyer. As GST proposes to roll multiple taxes into one, the cost of construction will come down. This will bring more liquidity into the market and boost home sales. Free flow of credit for developers will also translate into an increase in margin in their hands.
"There are a lot of products developers procure for construction of their projects on which there is double taxation at present. The cost they bear for these come to 20 to 25 per cent of the cost of materials they are buying. So, with the GST rate, between 12 and 18 per cent, it will reduce the cost of production for developers. This will be good for buyers, as developers will be able to pass a part of the benefit to them," Dhawan adds.
For developers, the actual tax effect will be lower than the existing one mainly due to the input tax credit on raw materials that developers get against payment of taxes on inputs like steel and cement.
Moreover, the increase in tax is very less for major inputs. The indirect taxes on steel were around 17 per cent and that has now come to 18 per cent under GST, similarly, for cement the taxes totalled to nearly 24 per cent which now has been standardised at 28 per cent. The GST rate for work contracts has also been fixed at 12 per cent.
"There is no doubt that GST will be a game-changer for Indian industry, including for the real estate sector, since it will subsume more than 16 major taxes and levies into a single consolidated tax. Additionally, the unified tax regime will stop the unwanted practice of double taxation, which hurt real estate and other sectors, given their cascading effect that inflated prices for end users. Though unorganised players are wary of GST's impact, it will create a level playing field for organised entities; the former will now come within the tax ambit. With GST enforcing transparent transactions across all domains, this will be a blessing in disguise for real estate developers, too," says Aman Agarwal, director, KV Developers, and a member of the Naredco governing council.
Through market mechanism, GST will impart more transparency to the sector, which faces a perception issue. GST would provide an audit trail for better control and monitoring of the sector.
- by Sunita Mishra
(With inputs from Srinibas Rout)
Source : PropTiger
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