Impact of GST on Construction Industry and Real Estate

Introduction

A single tax structure is definitely a welcome move and the introduction of Goods and Services Tax (GST) seeks to do just that by way of amalgamating a large number of Central and State taxes into a single tax. GST will not only address the concerns of double taxation but will also help in reducing the overall tax burden on goods and services. Furthermore, it will also help in making Indian goods competitive internationally thus providing a much-needed boost to the economy.

The Real estate industry is one of the most pivotal sectors in India and has seen a phenomenal growth, not just in cities, but even small towns. GST is another development that will have a significant impact on this sector. Let’s take a look at the impact of GST on the construction industry and the real sector.

• Transparency and Accountability :- GST will lend a whole lot of transparency in the real estate sector while also playing a major role in minimizing unscrupulous (black money) transactions. Currently, there is a huge percentage in every projects where expenditure goes unrecorded on the books. GST by curbing the practice of fake billing on purchase-side will help cut down cash component in construction, which in turn, will help in boosting stakeholders’ confidence.

• Input Tax Credit :- Although the GST rate of 18% on the supply of works contract in the construction sector may be higher than the previous rates, the regime of local composition schemes is over, though now they are eligible for full input tax credit. However, many of the listed construction services such as constructions of dams, roads etc. which were previously exempted are now under the GST purview. This basically means the average construction contract in the previous regime which used to hover around the 11-18% range is now chargeable at a flat rate of 18%. As a matter of fact, if you take exempted services into consideration, this marked difference is more pronounced, like certain infrastructure services are no more exempt in current regime. Having said that, thanks to the availability of input tax credit, the construction sector is expected to benefit in the long run. This is because, under the GST regime, the input tax credit on the raw materials would result in an overall neutral tax incidence for construction services. Additionally, with GST, real estate developers will have access to free input tax credits on GST paid for services and goods purchased by them while the rate of GST on outward supply is 12% including the value of land. As the inward supply consist of many a items with more than 12% rate, it is expected not a very significant cash flow will involve in paying GST on outward supply. This will not only help in reducing the cost for the developers but owing to this, they can even pass on the benefit of these credits as a reduction to potential buyers. The significant point is it takes away the ambiguities of pre-GST regime, and resultant litigation, so far as the indirect taxation on real estate is concerned.

• Compliance and Efficiency :- Thanks to the abolition of various central, state and local taxes, GST will permit quicker and easier transfer of goods between states.By implementing a uniform tax structure,the entire real estate sector will stand to benefit thus improving the tax compliance. GST will also inadvertently replace most indirect taxes, with a single tax, thereby ensuring an overall efficient taxation system.

• Double Taxation :- The Real estate sector was plagued with several issues regarding multiple taxation which amounted to over 25 percent in indirect taxes. GST will break the shackles of double taxation by freeing home buyers and investors from the hassle of paying several state taxes at different levels.

• Stamp Duty and Registration :- The remaining hurdle is that Stamp duty is not to be subsumed under GST and hence will continue as it is today. There is no provision for input tax set off available for the stamp duty paid for the land which basically goes against the entire premise of GST. Moreover, there would be no change in registration charges as well on real estate sale transactions. The silver lining as such is that GST will subsume the service tax and value added tax (VAT) charges which were payable on sale of under-construction properties.

Final Thoughts

Overall, GST is expected to help bring a lot of required transparency and accountability. Moreover, owing to the expected free flow of credit, developers should be able to enjoy an increase in overall margin. Whether these benefits trickle down to the consumers is yet to be seen as the pricing in this sector tends to be dictated by market forces rather than costing policies. Looking from the consumer point of view, the one primary advantage would be in terms of decrease in the overall tax burden on goods and increased transparency in tax system. GST will also help in eliminating unnecessary paperwork while eliminating time wastage spent by good suppliers at various state borders. One thing for sure is, the impact of GST will be felt albeit after a while.