Impact of GST on Primary Real Estate

GST (Goods and Services Tax) envisioned as one nation one tax and supposed to reduce anomalies in the previous taxation regime called Tax Terrorism or Tax on Tax. The major benefit of GST is its an origin based tax. 

The taxation structure before GST mentioned below : 

1. There used to be 1% VAT state levied tax on Material used in Construction for under-construction properties. 

2. Along with that there used to be 4.5% Service Tax on Labour or Work Contract in under-construction properties.

3. Stamp Duty at 5% and Registration at 1% or 30,000/- whichever is lower.

The total tax for buying an under-construction property comes to 10.5% + 1% or 30,000/- whichever is lower.

Post GST, the taxation structure looks like mentioned below :

1. 18% GST with abatement of land cost comes to 12% GST on Under-Construction Properties with Input Tax Credit. 

2. Stamp Duty at 5% and Registration at 1% or 30,000/- whichever is lower.

The Total Tax for buying an under-construction property comes to 12% GST + 5% Stamp Duty + 1% Registration Fees or 30,000/- whichever is lower.

There is a clear cost escalation for the end-user of 18%-11.5% = 6.5% (Assuming 1% as Registration fees for the property). The ambiguity for the developer arises here, where he is not yet aware of the consequence of Input Tax Credit which he will avail of from his suppliers. Hence, the price escalation for the buyer or the developer absorbs this uncertainty and bears it till he receives the Occupation Certification/ Building Completion Certificate for the Property. Here also the inflows will not be allowed to be claimed as Input Tax Credit by the developer. (Suhas please check on this, I am half sure).

In a property market like Mumbai, its a huge blow for the developer, where the demand is sagging due to rising property rises or flat property prices from past 3-4 years along with rising inventory overhang. Adding to it the compliance costs of RERA to be borne by the builder. Time will tell only the fittest will survive.