Impact of GST in Real Estate Sector

Overview on Real Estate

The real estate sector is estimated to account for about five per cent of Indias gross
domestic product (GDP). However, this sector has always been riddled with litigation
owing to multiplicity of taxes and dual administration mechanism. Exposure to
conundrums of both Central and State levies was a major threat for the industry. One
such challenge was the management of the multiple Indirect Taxes levies such as
Service Tax, VAT, Excise Duty etc. which has now been removed by unified indirect tax
regime, GST.

GST Impact

Taxes Effective
for mostTax of Tax
the Rate
Sl. inputs Rate
shall under
remain same
Inputs under GST
No. as in previous
the earlier regime.
Regime
regime
However, certain inputs
1. Cement 30% Fly ash bricks
like Plaster, 28%
2. Wall Paper and iron
28.82% 28%
rods will see a
Paints &
reduction of tax under
3. 28.82% 28%
Varnishes GST.
Putty, Wall
4. 28.82% 28%
fittings A comparative tax rate
5. Plaster 14.50%
has been 5%
drawn in respect
6. Ceramic Tiles 28.82%
of inputs 28%
generally used
Sand lime
in this sector.
7. bricks, Fly ash 18.13% 12%
Bricks
8. Iron Rods 28.82% 18%

Construction Service
GST rate for all under-construction properties have
been fixed at 18% of the property value, subject to
deduction of 1/3rd of the value being cost of land.
Sale of land and sale of building are exempt from
the definition of supply in the GST law. Hence the
effective GST Rate comes to 12%. However it is to be kept in mind that supply of under-
constructed complex, building, civil structure or a part thereof is to be considered as a
supply of service, till the date of receipt of completion certificate or first occupancy,
whichever is earlier.

Works Contract Service

Under the previous regime, Works contracts comprised of two different kinds of taxable
activities, viz. supply of goods as well as supply of services. This was subject to
litigation before various authorities and courts. The supply of goods was taxable in the
form of VAT and the service component was taxable under service tax. Hence, different
aspects of a single activity were taxed by different laws.

GST aims to put an end

to the uncertainty for
the legislature.

Works contract has

now been considered
as a supply of service
as per Schedule II of
the CGST Act, 2017.
The rate of tax being
18%

Under the previous regime, certain abatements were prescribed for works contract.
Service tax was paid @15% either on 40% of the value of original works or on 70% of
value in case of repair, maintenance work. No such abatement has been prescribed yet
under the GST regime and this may lead to increase in tax burden. However, increase in
ITC bracket is expected to compensate the above effect.

Tax Levy and Anti-profiteering rule

The earlier tax regime was very complicated for buyers in as much as buyers were liable
to pay tax depending upon the construction status of the property and the State where
it was located. Further, there were levy of taxes on property under both Central as well
as State statutes like the levy of VAT, stamp duty and registration charges being State
levies were different for each State. Service Tax was however, applied uniformly at a
central rate. Therefore, the computation of taxes under previous regime was quite
tedious. With the advent of GST a blanket rate has been prescribed for all under-
construction properties. The stamp duty and registration charges would continue to be
levied as such. Summarily, GST is a simple tax applicable on the overall price.

The seamless flow of input credits under GST will be passed on by the developer to the
buyers resulting in reduction of the price. The benefit of the additional tax credit under
GST needs to be passed on the ultimate buyer as provided by the anti-profiteering
provisions contained in the GST law. Therefore, there will be a win-win situation for
both buyers and developers.
However, the methodology for reduction in price of supply of goods or services are yet
to be notified in the aforesaid rules albeit stated that the benefit of input tax credit
should be passed on by way of commensurate reduction in prices to the recipient.

The concept of anti profiteering may be presented in the illustrations below:-

INR INR in
Credit on inputs
ITC available u/s 140(3) of in Lakhs
the CGST Act, 2017 Lakh VAT on Stock 2.7
s Excise on Stock 2.5
ITC of VAT in respect to raw GST on purchases of inputs
materials of Rs. 20 Lakhs 9
2.7 @18% on 50 Lakhs
(say) as on 01.07.2017 Total additional credit due to
(@ 13.5%) 14.2
GST
Excise Duty in respect to raw
materials as on 01.07.2017 2.5
(@ 12.5%)

INR in
There
Sale Consideration is an additional
Lakhs credit available in
Sale price of flat
GST(saydue
14 to
in increased base. This shall have
1400
nos.) @ Rs. 1cr each
a favorable impact on the price.
GST @ 18% of 2/3 rd of
168
sale price
Total Sale price 1568
Credit available
14.2
additionally under GST
Reduced price 1553.8

Clarifications in respect to the above calculations are expected from the Ministry of
Finance in the due course of time. This shall reduce the complexity of calculations and
periodicity, to reflect such commensurate reduction, which may help the industry to
comply with the anti-profiteering provisions.

Input Tax Credit

Particulars Previous Tax Regime GST Regime
Under the previous regime,
CENVAT credit not
credit of taxes paid on Full ITC
Inputs available
procurement of inputs, available
Vat credit not available
used for providing works
Input CENVAT credit Full ITC
contract/construction
Service available available
service, was restricted.
CENVAT credit Full ITC
Capital
available in two available in the
However, credit of input Goods
trenches year of receipt
services and capital goods
used for providing works contract/construction service were available.

Under the GST regime, Input Tax Credit (ITC) of goods and input services is restricted
only in the event when the goods and services are being used for construction of an
immovable property (other than plant and machinery) by a taxable person on his own
account including construction of such immovable property for furtherance of business.
ITC is not restricted when goods and services are being used by a taxable person in the
same line of business. Hence, under the GST regime, builders/ developers would be
eligible to take ITC on inputs which was earlier restricted.

Tripartite Business Model and Transfer of Development Rights (TDR)

This is a very common business model in the construction industry wherein

construction service is provided by the developer or builder to the landowner and the
buyers. The taxability on supply of construction service under GST regime is in pari-
materia with the previous law for both the landowner as well as the buyers illustrated
as follows:-

Under the previous law, in case of provision of service to other to buyers other
than land owners and the builder/ developer received consideration prior to the
date of issuance of completion certificate, the same was taxable under Section
66E of Finance Act 1994. Whereas, in case the entire consideration was received
post completion, then the above transaction is not covered by the said section of
the Finance Act, 1994. So, is the provision laid down in point 5(b) of Schedule II
to CGST Act, 2017.
 In case of provision of service to landowner, the builder/developer receives the
consideration in the form of TDR prior to the issue of certificate of completion by
the competent authority; therefore, the same is taxable under Section 66E of
Finance Act, 1994. The same view has been taken under GST.

In light of above where redevelopment of properties take place, there is barter or exchange
occurring between the developer/builder and the owners in terms of developmental rights
against issuance of re-developed flats/properties, thus, forming supply of service wherein
consideration is in form of TDR, taxable under GST at the rate of 18 percent. However,
for supply of service to the customers GST is levied at the rate of 18 percent subject to the
abatement of 1/3rd of the total value of consideration deeming to be the value of land.
(Thus effective rate under GST comes to 12%).

Since GST is not leviable on Ready-to-move in properties, the impact of GST on buyers
of resale properties is likely to be very little. However, in respect to the under-
construction property, the developer shall be eligible to seamless credit that may be
subsequently passed on to the final price charged to the buyer. Gradually, with the flow
of time under new indirect tax regime, the marginal change in the percentage of
construction materials will make a huge difference as transportation and logistics costs
reduce in the single taxation system. This will bring down the cost of construction.
Consequently, this will bring more liquidity into the market and will bring increase in
sales of properties.