“What is GST?” – This was the question on every Indian’s mind, prior to the implementation of new Goods and Services Tax. In his speech, introducing the GST, PM Narendra Modi stressed on the benefits of this “one tax” policy for various business sectors.
A few months down the line and Indians have come to terms with the general gains of this new tax regime. What we understand so far is that: a multitude of different taxes have now been divided into four tax rate slabs (of 5%, 12%, 18% and 28%). This has simplified the taxation principles for almost all business domains. And the real estate sector is one of the biggest gainers of the new “One Nation, One Market, One Tax” principle!
Real estate sector has been an important contributor to the welfare of the Indian economy. Apart from being the second largest employer (after agriculture), it contributes about 5-6% to the overall nation’s GDP! The growth estimates for the real estate sector, post GDP, are estimated at 30% (annually) over the next 10 years. And there are plenty of reasons for the real estate sector to be happy about the GST. Prior to this one tax regime, the sector was negatively impacted by the multiple taxation policies. GST has brought a lot of sanity into the sector and the positive impacts are already been witnessed. So, let us judge the impact of GST on key areas of real estate business.
Real estate buyers and investors
Before: Post July 1, the buyers and property investors had to pay taxes depending upon the construction status for their property as well as the location (state). The taxes varied in terms of completed and under construction properties. When purchasing under construction properties the buyer had to pay various taxes such as VAT, stamp duty, service tax and registration charges. On the other hand purchases of completed projects needed only the payment of stamp duty and registration charges. The taxes varied from one state to the next, as VAT, registration charges and stamp duty were levied by the states.
After: With the implementation of GST, all these tax payments have been simplified and unified. Any property purchase, where the property is in the construction phase, will require a payment of 12% taxes on the net property value. This payment does not include stamp duty and registration charges. The earlier taxation norms still apply for the completed projects. The buyers do not have to pay any indirect taxes, apart from GST, on the sale of ready-to-move properties.
Real Estate Builders
Before: In the earlier times, builders had to pay a multitude of taxes on construction material, in multiple stages of their construction, such as central excise duty, VAT, customs duty, entry taxes, etc. Apart from this they had to also pay a 15% tax on other areas such as architect fees, labor charges, legal charges, approval charges, etc. The burden of so many taxes impacted in the end offering prices to the buyers. Apart from this a large percentage of the real estate project expenditures went unrecorded. This led to discrepancies.
After: The simplified taxation policies of GST have reduced the construction costs to some extent. Just as an example, purchase of cement will now lead to 28% taxation on the net purchase amount. Apparently, this might be higher than the 24% charges builders were paying beforehand, but there are many other sub-taxes that are included here. The purchase of iron rods and pillars, which were charged at 19.5% beforehand, are now charged at 18% which is again less than the previous taxes. Apart from this, the reduction in the costs of logistics has also led to an overall reduction in the construction project costs. The provisions for input credits have also led to reduction in the end costs.
Concept of Input Service Distributor (ISD)
Before: Real estate developers ended up paying more taxes than they were liable for. This was caused by the taxation norms for multiple states. As a result, the project costs increased.
After: The new concept of ISD would benefit developers dealing in two or more locations (states). They would get a tax credit on the purchase of goods or services. Any supplier would be considered as an ISD. The ISD can transfer credit for any type of GST such as CSGT, SGST, or IGST. Under this new norm, you could be operating across many states, but the taxes would be levied as per your headquarters. This has already led to a major reduction in the construction related taxes.
New compliance requirements
The compliance requirements have definitely increased and become stringent under the GST regime. Businesses need to file their annual returns on or before December 31, for the financial year. Returns should be filed for each branch or warehouse used by the business. If the business turnover crosses the threshold of Rs 1 crore, then a mandatory audit is required by a Chartered Accountant or Cost Accountant. In such scenarios, the annual returns need to be submitted along with a copy of the audited annual account and reconciliation statement.
Automation is the call of the hour
Real estate businesses need to gear up for the automation needs. Their IT systems have to be better equipped to tackle the changes. The Real Estate (Regulation & Development) Act of 2016 has already stressed on the new and urgent needs of automation. By adopting a new IT approach, businesses will enjoy a list of great benefits. With automation businesses are assured of timely compliance, comparison reports, report generation, decision making, and cost effectiveness in staffing and other key business areas.
In the last few months, the unnecessary skepticism around GST has been busted many a times. As you can well see, GST has ushered in a new era of prosperity for the real estate sector. By reducing costs and simplifying the taxation process, GST has meant that properties across India have become less costly than they earlier were!