GST Impact On New Homes In Chennai
GST subsumes over 16 major central and state taxes, including excise duty, value-added tax (VAT) and service tax into one consolidated tax. Has the property price come down now? Who gets the benefit of GST? Is it you, the buyer, or the seller that gains from GST?
The Government has included an anti-profiteering clause in GST law. The law makes it mandatory to pass on the tax reduction benefit to the customer.
• Government has included an anti-profiteering Clause in GST law
• Passing on the benefits of tax reduction to customers is made mandatory
• As per some experts, there will not be much of an impact in the short term
Developers have short-term challenges in this new tax transition period. Some experts do not see much of an impact on prices in the short term. However, the simplified tax structure is expected to equally benefit all the real estate stakeholders in the long term. Property prices are expected to soften by 1-3 per cent. The impact would vary depending on the extent of input credit transferred, cost structure and property completion status.
In the current taxation system development and sale of property attracts a multitude of state and central taxes. For the buyer, taxes applicable and their percentage vary depending on the construction status of the property (under-construction versus complete) and the state in which the property is located.
In case of purchase of an under-construction property, the buyer has to pay VAT, service tax, stamp duty and registration charges. Whereas in a purchase of a completed project, you are only to pay stamp duty and registration charges. VAT and service tax are exempt. It is the State that levies VAT, Stamp duty and registration charges. And so, they differ from State to State. It is the Centre that levies Service tax. It is charged on construction cost. Effective service tax paid by customer comes to around 3.8 – 4.5 % of sale agreement value (ex-taxes). In the previous tax regime, it was difficult for buyers to ascertain the components included in calculation of VAT and service tax. GST takes away that confusion.
• Under-construction properties will be charged at 12 per cent on property value (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 on the sale of such properties. Stamp duty and registration charges on the buyer will continue on under-construction properties.
The transparency in the GST will help buyers. Developers can avail of input tax credit on the sale of under-construction property against taxes paid by the property buyer. This won’t be possible on a completed property.
VAT (different from State to State) and Service tax together account for 7-9 percent of the ticket price on residential property. This is in fact 3-4 per cent lower than GST rates. However, the builder will have to pass on the price reduction benefit to the buyer due to the input tax credit the developer enjoys.
Under the previous tax regime, property developer had to pay Central Excise Duty, VAT and ENTRY TAXES (levied by States) on construction material. A developer paid 15 per cent service tax on services he used such as labour charges, architect fees, approval charges and legal fees. The developer used to pay multiple-taxes under the previous tax regime. The cumulative burden of those multiple taxes eventually used to get passed on to the buyer.
However, in GST there are no much tax levied on major construction materials and as transportation and logistics costs are now reduced, the overall cost of development has come down. Both developers and buyers stand to benefit from this. As developers can claim input tax credit, they stand to make more profits than they did before.
RENTAL INCOME AND GST
Rental income from residential property is exempt from GST. However, any earnings over Rs.20 Lakh per annum from renting or leasing for commercial purposes attracts levy. Rental income from residential house si exempt from GST. But if it is rented out or leased to a commercial enterprise at an income above Rs.20 Lakhs per annum, it will attract GST.
A taxpayer earning more than the exempted threshold will have to register with GST Network and pay applicable taxes.
The actual GST on under-construction properties stands at 18 per cent. However, GST on such properties in effect would be 12 % because developers will be able to claim input tax credits.
Homebuyer used to pay several indirect taxes amounting to about 11 per cent excluding stamp duty.
However, a developer of ready-to-move-in apartments/villas cannot claim full input credit, prices of ready-to-move-in will be higher than under-construction ones. Developers will still get some benefits on projects under construction, while they will have to pay more taxes on ready-to-move-in projects as they are kept out of GST ambit.
As the Government has asked developers to pass on the benefits of lower taxes under the GST to property buyers by bringing down prices and installments. Builders and developers cannot charge customers higher tax on installments hereon.
Go ahead, make your home purchases now with more transparency and assurance of value you get in return for your investment. Click here for great homes you can buy for cool price points.