Investing in real estate is no small ask. Hence, it is always a plus to have an idea about the sector and its trends. Now that the Indian government has introduced the Goods & Services Tax (GST), it is all the more important to know the rules and how GST will affect real estate decisions. The primary aspect of the new law is to be able to distinguish between what is happening today and what will happen tomorrow. When it comes to taxation, both the Centre and the states have a different role to play.
Hence, there will be dual GST as both the governments will be levying tax on goods and services purchased. Every state has its own GST Act and rules. This taxation is known as SGST. The Union Government has introduced the Central GST law, known as the CGST. If there is interstate transaction of goods and services, then integrated goods and service tax (IGST) will come into effect, which is central and state components rolled into one tax. Due to GST, a number of taxes have been discontinued.
From Union Government’s perspective, service tax, central excise, special additional duty and two portions of the customs duty will disappear and merge into GST. On the other hand, from the state’s perspective, “VAT (value added tax), entry tax, octroi, purchase tax, entertainment tax, luxury tax and the various cesses and surcharges will all be subsumed into the new tax regime,” reports ET Realty. Stamp duty, which is a state duty, stays. Customs duty is also staying, so will the three percent cess on customs duty.
For under-construction properties, the GST rate is 18 percent (effective rate 12 percent). Water charges will attract concessional GST though electricity usage has been kept out of the GST ambit. A person, whose annual turnover is below INR 20 lacs, may or may not get registered under GST and pay the tax. Under the reverse charge mechanism, in case a person makes transactions from unregistered dealers, he will have to pay the tax within 30 days. In terms of real estate, input tax credit is the biggest factor for GST.
This is because there cannot be a tax on tax. Thus, GST charged by contractors on construction of a house, will be credited against the GST charge on sale. A composition scheme exists under GST, which is restricted to an annual turnover of INR 75 lacs. It is a simplified scheme requiring a payment of one to two percent on the entire invoice, sans ITC. This is not a state specific turnover but a PAN-based turnover. Then there is also the anti-profiteering clause to check collusion between businessmen, not passing on profits to consumers.
According to GST, if a developer gets extra credits, the price of the apartment has to e reduced by that amount. The definition of works contract has also changed after GST. Now it means any contract involving “construction of an immovable property, services to immovable property, whether goods or services.” Typically, if a sale is happening for an under-construction property, GST will come into effect. Similarly, a completed project that has received completion certificate and occupation certificate won’t attract GST. Stock transfers also attract GST.