24 Nov 2016
GST impact on real estate sector

IMPACT OF GST ON REAL ESTATE SECTOR

Real Estate Sector is one of the highest contributors to the GDP of the country and it employs highest number of people after agriculture. The housing sector contributes up to 6-8% of our economy’s Gross Domestic Product (GDP).

Impact of GST on real estate in terms of outflow for developer & consumer will depend on the final rate of GST. Most important thing is to know what will be the final rate of GST because if the rate is higher than the existing one, then it will increase the final cost of buying the flats/home.

Present Regime

Tax Rate:

In the current scenario VAT @1.25% or 5% (Depending on each state) and service tax @ 4.5% on sale of residential flats which are construction. There is no service tax on sale of flats for which certificate completion/occupancy certificate is received from the competent authority, as it is treated as sale of immovable property.

CENVAT/VAT Credit:

CENVAT Credit on input services is available to the developer for construction of flats.

CENVAT Credit goods and capital goods and VAT Input Credit are not available to the developers who opted for abatement and concessional rate of tax (Composition scheme).

Registration:

There is concept of centralized registration under service tax law through which tax payments and returns filing is done at one place even though projects are executed in different states. In VAT there is no centralized registration.

Return Filing:

Under VAT Laws Monthly VAT/CST returns are required to be filed and service tax return is used to be filed half yearly. Therefore put to-gather 12 returns for VAT in one state and 2 service tax returns were used to be filed per anum.

In GST

Tax Rate:

Under old Law there is concept on abatement/concessional rate of tax levied on the Developers, which was passed on by them to the end customer as a benefit.

However, under GST regime based on Model GST Law there is no specific valuation provision (deduction of land or abatement or composition) has been prescribed for construction contract or sale of under-construction property. GST may be levied at 12%

The Model GST Law specifically treats a ‘works contract’ (including any transfer of property in goods in the execution of such contract) as a ‘service’. Service Tax and VAT will be replaced by Central GST and State GST whereas stamp duty stay unchanged as it is out of purview of GST. This means that the GST rate and provisions, like place of supply rules, etc. as applicable on services will apply to works contracts.

The Model GST Law also contains clear provisions for inclusion of free of cost supplies received by contractor would be liable to GST. Thereafter, the contractor may need to include value of such free supplies in the value of his services.

GST Credit

Following credit restrictions with regard to goods and services acquired for the purpose of construction of immovable property in the Model law

  • Goods and/ or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery
  • goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery’

The above-mentioned restrictions under credit rules could have significant adverse impact on Construction Industry.

Registration:

There is no concept of Centralized registration under GST. Registration may be required in each State where there is a premise from where supplies are being made. In case, works contract services if construction is made to different states, then it is required to take registration in each state.

Return Filing:

Under GST law monthly 3-5 returns are required to be filed on depending on applicability. Hence, mandatorily minimum of 37 returns to be filed per anum in one state. If in case the entity is carrying on business in more than one state, compliance cost is going to be huge.

The Industry has to represent to eliminate restrictions on GST credit and get clarity on abatement or concessional rate of tax to the Government.

In addition to the above compliances there is Real Estate (Regulation and Development) Act 2016 which already paved way for implementation.

With all the changes Real Estate Sector may have tough time in respect of compliances and administration cost. However, the boom in the sector and demand from the buyers and over infrastructure development may support the industry to maintain transparency and enough margins.

*The above analysis of GST impact is based on Model GST Law released by the Central Government.

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