Reduced Tax Liability On Construction Under GST & Its Likely Effect On Residential Property Rates


Rollout of the much talked about Goods and Services Tax has commenced on July 1, 2017. The conversation surrounding the sector has now moved towards whether there will be a rise in real estate prices as a direct consequence of GST.

The larger opinion among tax consultants and industry members seems to be that prices will not be affected much. According to reports, even the National Real Estate Development Council (NAREDCO) holds the opinion that the GST rate of 12% on the real estate sector will not have a measurable impact on prices.

The fact that the Ministry of Finance sent out a press circular on June 15, stating “Construction of flats, complex, buildings will have a lower incidence of GST as compared to a plethora of central and state indirect taxes suffered by them under the existing regime”, should tell us the answer to the question about whether prices will rise is ‘no’. Let us properly understand why.

Tax Implications for Real Estate Companies:

According to the Government’s intimation on GST: Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly [The value of land is included in the amount charged from the service recipient] will be taxed at 12% with full ITC (Input Tax Credit) but no refund of overflow of ITC.

Supply of works contracts will be taxed at 18%:

Raw materials for construction are spread over the various tax slabs – most from 18% to 28%. But, Input Tax Credit would be available here too. On quick glance, the government does seem to have been mindful to keep the tax rate on materials more or less in tune with old rates for the most part, with marginal increase or decrease.

There will be overall reduced tax liability on construction companies. Up until now, there have been numerous non-creditable tax costs, like Central Excise Duty, Customs Duty, VAT, Entry Tax levied by the states, CST, etc to construction companies. There was no provision for Input Tax Credit for payment of Service Tax. All these taxes were naturally built into the final price of real estate.

Rates for Home Buyers:

Homebuyers will have to pay 12% GST. Additionally, they will pay a 5% Stamp Duty as well as the applicable registration fee. Construction companies are lobbying for Stamp Duty to be subsumed by GST. Earlier, buyers paid service tax and VAT on the purchase of under-construction residential units only when booked prior to their completion. Service tax effectively came to about 4.5% of the agreement value. In Maharashtra, under this composition scheme, the rate of VAT was 1% of the total agreement value, whereas registration was 1% of the value of the property but not more than Rs 30,000.

Even though it may appear as though home buyers have to pay more taxes, there were earlier a lot of hidden taxes that had to be passed on to them by developers, simply because it was part of their cost. Under GST, full input credit will be available for offsetting the headline rate of 12%. Consequently, the input taxes will not and should not be part of the cost.

Society Maintenance & Repair Costs:

Co-operative housing societies will have to pay GST of 18% on funds collected, if the collection amount is larger than Rs. 20 Lakh per annum. This substitutes Service Tax of 15% for the same slab, therefore representing a jump of 3%.

Under GST, the tax burden on Housing Societies will be lower because they will be entitled to Input Tax Credit (ITC) with respect to GST paid on capital goods, goods and on services for repairs and maintenance. In the earlier regime of Service Tax, if a service provider charged service tax for any input service, the society would be eligible to a CENVAT credit, however, ITC on Central Excise and VAT paid on goods and capital goods were not available.

In summation

Much to the contrary of buyers’ fears, there will be no consequential increase in real estate prices once the dust has settled with GST implementation. Developers may face some initial problems with compliance. A lot will depend on the accurate and timely keeping of accounts and how efficiently input credits are applied for, etc, thus ensuring the smooth flow of credits through the supply chain and no losses. Large companies that have systems in place will likely not make major blunders during the transition phase or later.

The Wadhwa Group is fully-GST compliant, and looks forward to an exciting future for the sector.

(Reference: The Ministry of Commerce press release “Reduced Liability of Tax on complex, building, flat etc. under GST”


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