Currently, real estate taxation for residential properties works something like this: While service tax rate is 15 per cent (14.5 per cent plus 0.5 per cent Krishi Kalyan cess), developers get abatement on land and other services. This leads to an effective service tax rate of 4.5 per cent. In addition, VAT comes at 3-5 per cent, depending on the state. On an average, VAT is 4.5 per cent. A consumer has to pay service tax, VAT and stamp duty (differs across states). Under GST, there will be a flat 12 per cent plus stamp duty that the state levies.
In other words, for a Rs 1-crore property, a buyer would have to pay Rs 8-9 lakh as tax (without considering stamp duty). Under GST, he would have to pay a maximum of Rs 12 lakh. “If the developer’s payout under GST
is higher, he might burden the buyers or pass on the benefit to them,” added Puri.
What could benefit developers — something they can pass on to buyers — is the provision of input credit, which was not there previously. “Earlier, builders paid excise on cement, steel, fittings, etc. But they did not get input credit on that. Now, they will get that credit. Usually, the excise cost is around 2 per cent,” said Abhishek Jain, tax partner, EY.
There is some talk the government might announce further abatement. But Jain doesn’t think there would be any abatement for the real estate sector, especially as input credit facility has been given.
People who have already booked a property but have yet not paid the money could be asked to pay at 12 per cent by builders. “The situation is quite interesting,” said another tax expert.
“The excise builders were paying for cement, fittings, etc, was included in the cost of the property though they were not getting any input credit on that. Now that they are getting input credit on this, they could actually cut prices to that extent.”
Tax experts are also betting on the anti-profiteering clause in the GST
law to benefit buyers. “There would be a liberal credit regime under GST
and developers are required to pass on the benefits of increased credits to the customers, according to the anti-profiteering clause of the GST law. Assuming GST would be implemented in its true spirit and developers will pass on the benefit of increased credits, buyers are likely to benefit from reduced property prices,” said Amit Bhagat, tax partner, PwC.