By Dr. Sanjay Chaturvedi, LLB, PhD
World over Real Estate is not subject to Goods and Services Tax. It should not be in India also because Land and building are not “goods” under Sale of Goods Act or any other tax for the time being in force. It is also not coming under the definition of Services either. One should be wondering as to why then GST will be applicable to Real Estate at all.
The GST will be applicable to real estate in India for two reasons. First, Work Contract Tax which was merged in Value Added Tax (VAT) and since real estate is subject to Work Contract Tax for all construction contracts, it was applicable. GSt will be replacing VAT and LBT and other taxes like Octoi etc, hence GST is applicable to real estate.
Secondly Since Service Tax was applicable to under construction projects and exempted only if the real estate got BCC and OC.
In both the cases, GST will be applicable. To what extent? we have to wait and see the rules to be framed by the Central Government in the Winter Session of Parliament. I think it has to be on construction part and not the cost of land appropriated in the project cost, just like Service Tax, which is applicable only on cost of construction and not land. VAT paid by builder by collecting it from purchasers will also be now treated as GST.
Hence GST will be applicable as Service Tax and VAT did. Now calculating on percentile basis, VAT usually is 1% across nation and Service Tax remain between 3 to 4% of the total sale price of real estate which comes to almost 5%.
Ideally, Stamp Duty should have been scrapped and GST should take care of such duties which is a burden some on property purchasers across the country. Rationalisation of Stamp Duty was mooted in National Housing and Habitat Policy and Urban Housing Policy, time to time, but we have to pay Stamp Duty inspite of Housing Policy’s intentions.
GST is seems to be tax reforms, which is actually is, as far as indirect taxation is concern but not in Real Estate. If the GST slab kept at 18%, we would be ending up paying 8 to 9% instead of 5% for aggregating Service Tax and VAT previously. Hence the property rates are bound to increase by 5 to 8% in urban metros and 5 to 6% in rural areas. Since properties more than Rs.1.5 crore are subject to Central GST and less than this are subject to state GST, rates remaining the same for GST, the cost of construction and land cost apportioned to project cost will vary between rural and urban centres.
But one thing is certain, the property prices will increase by 3 to 4% on amount of GST and its presumed rate. The rates for GST is expected to be fixed at a same percentage and not Ad Volarum as in case of many other indirect taxes.
Yes, construction cost will reduce since materials transported inter states and in multi states will have single tax system and not subjected to multi state Octoi or VAT. In GST, the set off of taxes may not be considered hence the advantage of Service Tax may not be available.
In all, one thing is certain that GST will bring an extra burden on real estate transactions. The tax will be applicable to all under construction projects and may not be applicable on finished projects with BCC and OC. Any second sale of properties without OC will also be subject to GST. All apartments under societies or associations who have not got OC or conveyance will also be subject to GST.