What was the impact of GST on Real Estate?

The impact of GST on the real estate industry is that real estate developers are allowed to claim the input tax credit (ITC) for building materials such as labour, cement, bricks, etc. With a uniform rate of tax, developers would get an input credit for GST paid for services and goods purchased by them, thereby reducing their costs, and which could be passed onto to the buyers. Under the GST, all other indirect taxes would be included, and the buyer would pay uniform 12% tax on real estate purchases, excluding stamp duty. The multiple taxes include Service Tax, Consumption Tax, VAT, Stamp Duty, and several others, in addition to what a customer has to pay on an unbuilt property itself.

Cuts were taken to ensure that property became more affordable to every ordinary person, with a view to reaching the target of housing for all by 2022. Under the new tax regime from April 1, 2019, effective tax rates on properties under construction were reduced, the GST rate on residential properties which were not a part of affordable housing segments was reduced to 5 percent with no ITC available, while affordable housing segments were to be levied at 1% with no ITC. With reduction, GST on under-construction affordable housing units was at 1 %, whereas that on non-affordable projects was at 5 %, without input tax credit. The GST for construction costs of properties is reduced because the multiple taxes are blended because of the input tax credit.

There are several taxes like Excise Duty, VAT, Customs Duty, Entry Tax, and other input taxes. The developer was allowed to charge taxes to customers, and to deduct their taxes from purchase orders and labour contracts paid to their suppliers, thereby actually reducing their construction costs by as much as input taxes were allowed. The cost of construction to the developer was reduced by implementing the GST, since GST absorbed several other taxes into one single tax. The effect of GST was that buyers chose pre-existing properties because it proved to be cost-effective, since construction costs of properties under construction also increased.

As the cost of construction and under-construction properties is rising, the direct impact of GST was for home buyers to favour the pre-built properties because they proved to be more affordable. The issue of trickle-down effects had to be addressed, which is a tax-on-tax situation which puts financial burdens on the developer and the home buyer while the building and buying process is going on. Some of the taxes which were payable by real estate developers prior to GST including value added tax (VAT), central excise, entry tax, LBT, octroi, service tax, etc.

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