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A 5-Point Guide For Buyers To Understand The Effect Of GST On Real Estate
September, 18th 2017

The big question for the buyer: "The property you want to buy, has it got cheaper or more expensive after the implementation of GST?"

The answer is here.

After two and a half months of much confusion around Goods and Services Tax (GST) on real estate that came into effect in India from July 1, 2017, the answer to the big question is here: "It depends on these 5 points."

1. The Goods and Services Tax or GST is levied only on under construction properties or on under construction units in unfinished projects. If you bought a property after July 1, 2017 and the same has already received the completion/occupancy certificate, GST would not be charged on the sale price.

2. Before the implementation of GST, buyers were charged service tax, state value added tax (VAT), registration charges and stamp duty on the sale price of the under construction properties. The service tax and VAT together accounted between 3.75 per cent and 4.5 per cent, depending on the state where the property is located. The GST which is levied at 12 per cent will only replace the service tax and VAT. Registration charges and stamp duty are state levies and would remain the same as earlier unless the respective state decides on any rate change in them.

3. So does this mean that the under construction properties have become more expensive as the tax rate has increased from 4 per cent (service tax and vat) to 12 per cent (GST), a difference of 8 percentage points?

Not really.

The anti-profiteering clause in the new GST regime insures that any benefit that the builder gets after taking the input tax credit has to be passed on to the customer. In the new GST regime, the builder can avail the input tax credit (tax paid) on construction and services, which is about 15-20 per cent of the total cost of construction. This would further help in reducing the sale price of the property and the effect of the GST would come down significantly.

4. So does this mean that all the under construction properties have become cheaper after the implementation of GST?

Not really.

The builder can only avail the input tax credit against the cost of construction, which largely ranges between Rs. 1,200 and Rs. 2,000 per square feet for most of the projects. There can be exceptions where the cost of construction can go beyond this range. There is no input credit for the cost of land.

The input tax credit of builder, which can be passed on to the customer, will range between Rs. 250 and Rs. 400 per square feet (in most of the projects).


Only properties where the land value is less, and on which the GST levied on sale price is less than Rs. 250-Rs. 400, will get cheaper.

5. Effect of GST: Who gains, who loses?

GAINERS

For customers who buy under construction property priced below Rs. 4,000 per square feet, the prices will come down.

NO EFFECT

For customers who buy under construction property priced between Rs. 4,000 and Rs. 5,500 per square feet, the prices will remain almost the same.

LOSERS

For customers who buy under-construction property priced above Rs. 5,500 per square feet, the prices will increase.

The overall impact of GST on the buyer depends on the level of investment one is going for. The affordable housing segment should get a boost in the new regime. But if your dreams are big then surely you would have to work harder for that dream home of yours.

The government benefits because of the transparency that GST has brought into the industry. The GST regime would cut down a lot on the cash transactions or "kacha bills" as there would be no input tax credit for the same. Small and marginal construction contractors will need a lot of education to remain in the system. As for the builders, they would have to work a lot harder on their input cost and sale pricing strategies to incorporate the price rise in their projects (if any) after the implementation of the new regime.

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