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). Homebuyers could see a rise of 1-3 per cent in overall cost under the new indirect tax regime. The goods and services tax (GST) has brought the real estate sector partially under its ambit by taxing works contracts at 12 per cent, exclusive of stamp duty.
Under current service tax, with abatement rules, the effective service tax for under-construction properties is 4.5 per cent. Over this, states have value-added tax (VAT) of 3.5-4.5 per cent. The total is not more than 9.5 per cent in any state. Under GST, there will be a flat 12 per cent plus stamp duty that the state levies.
Home buyers are unlikely to be burdened with additional tax outgo and cost from the introduction of GST.According to industry experts, prima facie it looks like that there will be a neutral impact from cost perspective. Although the work contracts will attract around 12% and most of the construction material is under the 18% and 28% slab, the availability of input tax credit should neutralize the overall impact. A lot, therefore, will depend on the proper implementation and a proper system of claiming tax credits.
Value added Tax
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. VAT is a state subject and varies between 1% and 5% of the property value.
A homebuyer has to pay stamp duty to get the property registered. Even after GST, Stamp duty will continue, as GST will not subsume stamp duty levied by government.
What could benefit developers — something they can pass on to buyers — is the provision of input credit, which was not there previously. “Earlier, builders paid excise on cement, steel, fittings, etc. But they did not get input credit on that. Now, they will get that credit. Usually, the excise cost is around 2 per cent,” said Abhishek Jain, tax partner, EY.
As of now, taxes and duties can increase the cost of property by 15-18% for homebuyers. After GST gets implemented, whether the cost of houses will come down or increase, will depend on the rate at which GST is charged and whether there will be any abatement or not.