Builders seek cut in GST Rates, rationalization of tax slabs

by Richa Sharma Finance Expert

We all know about the revolutionary change in tax laws that were brought about by the introduction of Goods and Service Tax (GST) last year. Based on the principle of ‘One Nation, One Market, One Tax’, the GST bill comes with the promise of making utility goods cheaper than before and also making a good contribution in the country’s GDP in the long term. But it is to be noted that with the introduction of GST, there have been marked changes in certain sectors. It is noteworthy how the FMCG sector is fueled towards benefitting out of the move and sectors like healthcare and pharmaceuticals, telecom, automobiles and more will have to pay more taxes than they had to before.

Like every other crucial sector, the introduction of GST has taken the real estate business by storm too, but for the greater good. The real estate industry contributes massively towards the country’s GDP (5-6% on an average) in a financial year and it shows huge potential for growth, with an estimated annual growth rate of 30% in the next decade. GST has eliminated uncertainty and complexity in the real estate industry by clearly laying out tax laws that shall not only be a lucid guide for taxation compliance but also will contribute towards creating more jobs, reduced cost of logistics and expenses and thus, will benefit the buyers to a great extent.

Let’s dive deep into the topic and consider certain important points.

Impact of GST on Real Estate Investors and Buyers

Income Tax Slab for real estate buyers depended on the status of construction before GST took over last year. The buyers were charged after taking into consideration whether or not the property is complete. The charges with respect to VAT, stamp duty and registration varied from state to state. The buyer has to pay service tax and VAT in case the construction of the property is not complete. After the completion of construction of a property, the buyer is only liable to pay stamp duty and registration charges. However, after the introduction of GST, the mentioned complex process has been made more transparent because now the tax is applicable to the overall purchase price of the property. No indirect taxes have to be paid on properties which are readily constructed. Simply put, the buyer only has to pay taxes equaling 18% of the property value excluding registration charges and stamp duty.

Impact of GST on Real Estate Developers

The ‘tax-on-tax’ charges that existed previously were also responsible for the inflated price of the real estate properties that would ultimately have had to be borne by the buyers. The liability for the developers previously included everything from central exercise duty to VAT, entry taxes and more and service taxes paid was 15%. With the elimination of all other taxes, the GST regime only requires the developers to take care of the cost of construction. We see that taxes are levied at the rate of 28% on cement which is more than the previous rate of 24%. The costs of iron rods and pillars have been plummeting because the taxes levied on them have been reduced from 19.5% to 18% as a whole. Also, the rate cut in the logistics sector due to the impact of GST has brought down the expenses further. Moreover, the elimination of all additional costs provides the benefit of the lowest price available to the buyers.

However, there are developers who have been unable to make progress on their projects since the introduction of GST and therefore have miserably failed to hand over the properties to the customers within the specified time frame. Very recently, a number of demands were put forward to the government by the builders implying a cut in GST rates from 18% on the property value to a flat 12%. The demands also included the creation of a ‘stressed assets fund’ so as to push some progress on projects that had been stalled for years. Besides, putting forward the mentioned points, the stakeholders also discussed the need for the implementation of the Real Estate Act (RERA).

It is estimated that the tax rates on various different items shall be brought down further, especially items that are under the top slab of 28%. Lowering of GST on a number of items falling under the highest tax rate of 28% such as paint and cement in the coming months will be a start. The move will also help in reduction of the cost of construction, ultimately speeding up the progress on stalled projects and reducing stagnation. Not only will the real estate industry make a benefit out of rate cuts but the move will also come as a relief to manufacturers in textiles. The government did cut tax rates on over 200 items last year, which only leaves about 50 items falling under the bracket of 28% GST.

Now that GST has taken over and modified the tax laws of every sector in the country, the need for the real estate agencies to adopt changes to their IT systems and to keep them updated is more than ever. There is a need for automation so as to comply with the new rules and remove shortcomings in the process. The developers shall benefit in many ways by adopting updated software that will ultimately result in efficiency. Day to day tasks such as decision making, report generation and comparison of reports, storage of huge data and information shall make operations easier. Also, a little investment in automation shall bring down expenses in the long term with reduced staff and available technical assistance. There is a lot of benefits to be availed if only one knows how to employ the right methods.

GST has made promises since its inception. Above all, with GST, the country’s GDP is expected to rise by 1-3% in the forthcoming years. The country did welcome GST which will hopefully bring down the prices of utility goods in the long term and provide the benefit of savings to sectors as big as real estate and also to the common man.