GST India: Impact on Real Estate

Real estate sector in India today is grappling with multiple taxes (VAT, Service Tax, Entry Tax Excise, Stamp duty etc.) and compliance has become a nightmare especially for developers operating in more than one state. The benefits accruing from implementation of GST in India would primarily be in following 2 areas:

1.      Uniformity in Taxation

Different states have varied interpretation and compliance requirements for real estate. The break-up of works contract between Goods and Services component also varies significantly between states (60:40 to 70:30 for VAT: Service Tax) leading to overlaps and double taxation. Under GST works contracts (composite supplies) are likely to be considered as services and only one levy will be applicable as a host of state and central indirect taxes will be subsumed.

Real estate companies are registered under composition scheme and applicable tax rate (on turnover) ranges from 1 to 4% across sates, hence uniformity could be expected across India in GST regime. Differences if any could be in the range of 1-2% on account of flexibility granted to states on SGST to act within a pre-defined band.

2.      Elimination of cascading effect

Currently real estate developers do not obtain credit for a number of taxes paid on inputs (entry tax, central excise, customs etc.) which lead to cost escalations to the extent of >20%. With single tax under GST and the continuation of the concept of Input Service Distributor (ISD), real estate companies could claim input credit across their projects located pan-India and pass on the resultant cost saving benefits to end customers. Similar benefits to commercial real estate projects could drive down rentals for the tenants.  

However, clarity is awaited on taxability of complex structures like development rights, valuation of land component, joint development (landlord-builder) projects etc. Point of taxation rules need to be well defined to arrive at tax liability. Resultant clarity under GST regime could reduce the number of tax litigations pending across multiple courts.

(The views expressed are strictly personal)