GST BECOMES A REALITY TODAY
From today, GST effectively cuts through a confounding Gordian knot of taxation complexity in the country. In other words, it replaces the multiple taxes levied by the central and state governments and will become subsumed of all the indirect taxes, including central excise duty, commercial tax, octroi tax/charges, Value-Added Tax (VAT) and service tax. GST has been predominantly conceptualised around a ‘One Nation, One Tax’ philosophy and will: ·
Help eliminate the previous cascading tax structure · Ease compliances · Create uniform tax rates and structure, and · Help in reducing additional tax burdens on consumers. However, the biggest game changer in GST is the introduction of Input Tax Credit, whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition.
This makes GST fundamentally a tax only on value addition at each stage. This means that the end consumer will thus only bear the GST charged by the last dealer in the supply chain, with set-off benefits at all the earlier stages. To ensure that manufacturers, developers and service providers pass on the benefit to the final customer, the Government has included an anti-profiteering clause in the GST bill under section 171 of GST law.
This clause clearly states that it is mandatory to pass on the benefit tax reduction due to input tax credit to the final customer.
A simple and transparent tax applied on the purchase price is the biggest take- away for property buyers. 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.
VAT (with rates differing from one state to another) and service tax together accounted for 7-9% of the ticket price for a residential property, which is 3-4% lower than the GST rate. Due to information asymmetry, however, consumers were largely unaware of how VAT and service tax are calculated — definitely, the entire tax calculation was too complex for laypeople to understand.
Any real estate product comprises of three expense components, namely land, material and labour or service costs. VAT is calculated on material cost, and service tax is calculated on labour and service cost. It is very difficult for buyers to ascertain what components were included for calculation of VAT and service tax.
The implementation of GST makes the calculation much simpler, since the buyer has to pay only a single tax. Also, the builder must pass on the benefit of the price reduction he enjoys due to input tax credit to the buyer.
GST: 12 per cent tax on under construction properties, developers to benefit
Eliminating the multi-tax regime, the Goods and Services Tax (GST) will impose a 12 per cent tax with full input tax credit on the under-construction properties.
The service tax exemptions on services through labour contracts of construction, erection, commissioning, installation, repair, maintenance, renovation, or alteration of any civil structure or other original works related to the beneficiary-led individual house construction or expansion under the Prime Minister’s Housing for All (Urban) by 2022 Mission, will be continued as according to the directives of the GST Council.
Completed and ready-to-move-in apartments will also be exempted from the new taxes. However, stamp duty and property taxes will most likely be applicable to immovable properties.
Earlier, under construction properties used to attract a reduced service tax rate of 6 per cent under a special scheme, VAT, mostly varying between 1 to 5 per cent in different states. However, under the earlier tax regime, the developers were liable to pay a separate VAT imposed by the states and could also not avail a deduction of the input tax unlike under the GST regime.
GST will eliminate all the other taxes, and the benefit of being able to claim input tax credit can also improve developers’ profit margins. Here are a few other benefits: ·
Major construction materials have not seen a major change in tax rate. · Cement will be taxed at the rate of 28%, which is higher the current average rate of tax around 20-24% ·
Iron rods and pillars will be charged at the rate of 18%, which is similar to the average rate of 20% under the old taxation regime ·
Paint, wall fittings, plaster, wallpaper and ceramic tiles will be taxed at 28%, which is also similar to the previous average rate of 20-25% ·
Sand lime bricks and fly ash bricks will be taxed at 5%, which is lower than the previous rate of 6%.
However, the marginal change in the percentage of these variables will make a huge difference as transportation and logistics costs reduce in the single taxation system.
While there might be marginal impact on the sector in the near term, we are definitely looking at a significant improvement in buyer sentiment.