GST impact on real estate: What will change when you go to buy a house?

Property purchase is one of the biggest financial decisions of a person. How GST, or goods and services tax, will impact the real estate sector? Will property prices come down? This would be the top of the mind of many prospective buyers.

Current Tax System:

According to the current taxation system, development and sale of property attracts multitude of state and central taxes. In case of purchase of an under-construction property, a buyer is subjected to payment of VAT, service tax, stamp duty and registration charges, whereas in case of purchase of completed asset, only stamp duty and registration charges are payable (VAT and service tax are exempt). Applicable rates for VAT, stamp duty and registration charges, all being state levies, are specified by each state.

GST Impact on Residential Real Estate:

Under the GST regime, all under-construction properties will be charged at 12% (excluding stamp duty and registration charges). It will not apply to completed and ready-to-move-in projects, as there are no indirect taxes applicable in the sale of such properties.

Benefit to Property Buyers:

A simple and transparent tax regime applied on the purchase price under GST is the biggest takeaway for property buyers. Also, a developer could avail input tax credit on sale of under-construction property (not allowed for completed property) against taxes paid by the property buyer, depending on applicable rules.

Benefit to Developers:

Major construction materials have not seen a significant change in tax rate under the GST regime but lower transportation and logistics costs under GST will reduce overall cost. GST will eliminate all the other taxes, and the benefit of being able to claim input tax credit can also improve developers' profit margins.

Government Role on this matter:

To ensure that developers pass on the benefit to the final customer, the government has included an anti-profiteering clause in GST law. Under this law, it is mandatory to pass on the benefit of tax reduction due to input tax credit to the final customer. One of the significant changes in GST is input tax credit, where credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition, thus helping eliminate "tax on tax".