In India, real estate is one of the rapidly growing sectors in recent times. The lump sum income from the real estate sector makes it one of the crucial pillars of the economy. Moreover, it has approximately a 7-8% contribution to the total GDP of India.
The imposition of GST has changed the shade of the real estate sector recently in the country. The current rate of GST on real estate is 5% on residential properties that come with ITC. On the other hand, 1% effective GST is imposed on the housing properties that do not have ITC and come under the section of affordable residential properties. Commercial properties in India have a 12% GST with ITC.
Have a look at the following table which contains the GST rates on certain things that have a direct connection with real estate.
So, it is clear from the above table that the government can incur huge profits not only from the real estate sector but the commodities mostly necessary for construction and housing.
Leading Impacts of GST on real estate
Here, we discuss the major impacts that GST has on the real estate industry.
Impact on developers and builders
There are mixed impacts of GST on real estate developers. However, the positive impact is quite major than the negative ones. Before GST came into being, all real estate developers had to pay several taxes to build a residential or commercial building. Some of these taxes were VAT, Excise Duty, Entry taxes, and Customs Duty.
Moreover, the ITC was absent before the GST was imposed on real estate. Earlier, labour taxes, service taxes, professional fees, and legal fees were also present. It was the sole responsibility of the builder to clear all the fees and taxes. Naturally, the burden transferred to the buyers of the property.
GST on real estate also led to the minimisation of the logistic costs which also eased the builders’ budget and they can now save more money marginally.
On the other hand, there are a couple of minor drawbacks of GST on real estate from the developers’ perspective. Nowadays, property makers have to make a lot of calculations to reach the exact amount of ITC. As a result, they can only say the exact ITC charge to the buyer during the last stages of construction. Many builders instruct the buyer to avoid purchasing a property in the early phase of construction.
The remarkable positive impact of GST on real estate in the buyers’ perspective is surely the property price reduction. Most of the charges mentioned earlier were variable according to the states. It resulted in lofty property prices in some states of India compared to others.
At present, property buyers only have to pay a 12% GST over the base price of the property. However, the trend of early purchase has diminished due to the ITC factor. Now, most of the short-term property buyers avoid purchasing a house if it is not near completion. Long term buyers can enjoy the benefit of ITC transfer and they, generally, plan for an early purchase.
GST’s impact on property stakeholders
As a flat 12%, GST is actively present on real estate now, the stakeholders are experiencing its effects based on budget results. Generally, the stakeholders deal with all types of necessary commodities that are necessary to build a property. You can find the details about the GST rates on different things in the table above.
The profit levels of real estate stakeholders depend on the total budget of the construction now. They also have to wait until the construction is nearly completed to calculate their profit. You can consider this technical shift as an impact of GST imposition on stakeholders.
ITC regulations and its impact
The ITC regulations due to GST on real estate have put a mixed impact on the industry. Here we present some points related to ITC.
Circumstances of ITC claiming
You can only claim ITC if:
- The services and goods you have taken as a builder are not for your personal use.
- Cleared all the tax returns related to the property.
- You have a proper tax invoice or debit note.
- You have received both goods and services.
ITC related restrictions
Some ITC restrictions prominently relate to the GST’s impact on real estate. These restrictions are only active in case of immovable property construction that you have done on your own money and machinery. This situation occurs because a self-constructed home is not considered as a real estate by the law,
- You cannot claim ITC if you have renovated the interiors of a service apartment.
- ITC claims cannot be done on the construction of the branch office by the Mantri Developers.
- ITC is available on machinery constructions made by a real estate company
Reduction in black money
GST has led to reductions in the cash component of constructions as inputs must be sourced from registered vendors in order to receive input tax credit. GST ensures both suppliers and recipients are liable to disclose transaction details. This provides a more transparent system, minimising the scope for cash dealings and paving way for reducing black money in the real estate world.
Impact on FDI
GST has caused a positive impact on foreign investments and through the seamless all-inclusive channel has been able to benefit the NRI community massively. GST has been able to create a simplified system of taxation, boosting the confidence of NRI market to invest in Indian real estate.
The cash flow in the real estate industry has developed a balance as a fixed active GST is imposed on it. Despite minor drawbacks, Big constructors are showing interest in building both personal and commercial buildings in most of the cities around India. As a result, urbanisation, and industrialisation in India is experiencing a sharp increase.
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Q. Do I need to pay the real estate GST if I construct my own house?
A. No, you don’t have to pay the real estate GST on constructing your own house. But you need to pay the same tax which is imposed on necessary items like brick, steel, cement, and wood.
Q. Does a business need multiple GST registration?
A. Yes, a business needs multiple registrations if it operates in more than one state in India. The same law applies for the business vertices no matter if they operate in the same state or multiple states.
Q. Is it a good idea to purchase a property during its early construction phase?
A. Yes, you can purchase a residential property during its early construction phase if you have a plan to stay there for a long period. This can lead you to enjoy the ITC beneficiary.
Q. As a stakeholder can I incur more profit in the real estate business?
A. Although the level of your profit depends on the budget of the builder, you can earn a good profit when the construction of a particular real estate property ends.