GST Effect on House Construction

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Building one’s own home is almost every individual’s dream and it requires both planning as well as courage. While, deciding upon getting a home loan is the most crucial step, understanding how it works or will work in the coming months is even more important. If you are building a home with an alluring image in mind, the first thing that anyone asks is, ‘Will GST affect home construction?’. So, will it affect home construction and real estate sector in general?
 
The GST Council has moved the real estate sector under the GST boundaries, only partially that too via works contracts. So that means, in a simple statement, that these will be at 12 percent slab with GST in action. With that in mind, it is worth mentioning that a homebuyer has to pay various indirect taxes, including excise duty, VAT, and service tax, which sums up to a tax of about 11 percent, excluding stamp duty. (Taxes have been fetched from Source 1 & Source 2)
 

Who pays what, and how much?

  • Under-construction real estate properties will be tabulated as the supply of services and hence will be liable to pay GST.
  • Sale of land and completed real estate properties are exempted from GST.
  • As per ICRA note, GST for real estate can be either 18 percent or 12 percent.
  • If the construction of buildings predetermined for sale to a buyer includes land in the sale value, the payable GST will be 12 percent.
  • If the land and construction values are defined through separate agreements, the payable GST will be 18 percent.

 

What gets consumed, what remains intact?

  • VAT (value added tax) and service tax that is currently a part of costs of under-construction properties, will be subsumed by GST.
  • No change will be seen in the stamp duty and registration charges for land, completed properties, and under construction properties. GST is not expected to subsume stamp duty and registration charges.

 
According to Mr. Jain, ICRA, the GST rates are higher than the current tax modules and tax rates for the individual buyer, in most of the states, but the seemingly higher GST rates should get balanced out if the developers pass on the perk of higher ITC (Input Tax Credit) available to them. In simple words, the developers are expected to pass the amount they earn as tax (ITC), in order to reduce the overall impact of high GST rates. He also added that, at the moment, a few indirect taxes paid by the developer, like CST on materials used for construction and excise duty aren’t taken into view as input. With GST in picture, the taxes at each level will be lowered as compared to proposed GST rates, which is expected to lower the total project cost in the near future.
 
Real estate has always been that one sector, where price control always seems out of hand. Many dreams of building a home get shattered with this unexpectedly high cost of the home construction, and yet developers keep complaining about their own problems in managing all this. This also results into late home constructions, in fact very very late. GST in real estate is a ray of hope in the direction of affordable housing scheme by the government, and it is expected to benefit both the buyer as well as the developer. The developer will have to invest less (with reduced levels of taxes), and hence buyer will pay less (due to less taxes being paid by the developer).