The Adverse Effect of GST on Real Estate Sector

The GST bill has been all over the news since its announcement. Some products and services are providing relief to people, while others are making them stock up their homes with products that are going to be expensive in the near future. Despite being in the limelight, people are still unsure about how it will affect them when it comes to making big financial decisions like buying a house or investing in real estate in Dhanbad.

The real estate sector has already experienced a slowdown after demonetization and in the current scenario, it is expected to suffer further as the cost of purchasing new houses would be increased by 8%, which consequently reduces the demand in real estate by 12%. Previously, a 4.5% Service Tax and around 4% of VAT was being paid. Whereas now property holders have to pay 12% GST, hiking the taxes by almost 3.5%, which in the context of today’s realty market conditions is a very significant hike.

With Real Estate and Regulation Act (RERA) already in place to provide a mechanism for this tax regime to work, the aim of the government is transparency and simplicity in the real estate market. The lack of proper infrastructure has led to builders and developers not being able to sell a single under construction flat since the last few days. This is mostly because they have not been able to register their projects on time because of government infrastructure not being in place. With the additional burden of GST, one can expect the real estate sector to go for a long holiday.

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Effects of GST:
• When it comes to GST’s impact on the commercial office real estate projects in Dhanbad – with the existing service tax for commercial leases at 15%, GST would be likely neutral overall (at 12% slight savings, and at 18% slight increase).

• Affordable housing is currently exempt from the service tax. It is likely that the government of India may come out with a clarification regarding the applicability or continue exemption under the GST.

• It is relevant to note that residential leasing is an essential demand, which will not fade away merely by higher taxes. Certainly, as the market readjusts to the new dynamics, we may be looking at rental stagnation or marginal decline, which will be infused by GST. However, in nature, the demand for rental housing is end-user-driven. So, we are definitely not looking at a major slowdown in this area because of GST even if residential leases are taxed.

• The real estate sector has implications for developers, buyers encompassing cost of land, material and building cost. In the course of GST, the cost of materials has underwent some minor changes like the cost of cement, paints, and plasters are to be taxed at 28% while iron materials at the rate of 18%. Construction of houses with high-quality materials may alleviate the overall cost as most of the materials fall in the 28% tax category.

• Also, the service charge given to the realtor for assistance in buying or selling the house, which is 15% now will considerably rise to 18% with GST.

• In the resale market, property prices are extremely subjective. To incorporate your expenses on the interiors as a seller one is free to quote a price over and above the average capital values of the location. You have a positive deal if the individual buyer is willing to pay a premium for the interiors of the apartment. However, it is notable that the taste in interiors is usually unique to each and every individual buyer. Each potential buyer may not necessarily be willing to pay the premium for the interiors.

• However, another problem that concerns the realtors is that of compliance as they are required to file the returns thrice a month. This makes the filing of returns both mundane and difficult for businesses with less number of accounting professionals. Realtors also look forward to a legal mechanism to deal with protection against defaults.

The rise and fall in prices totally depend on the demand and supply. The reasons and terms to pass on the GST input to the buyer are still questionable. Demonetization in the current setting is expected to suffer further as the cost of investing in new apartments in Dhanbad would be increased by 8%, which consequently reduces the demand in real estate projects in Dhanbad by 12%.

The Goods and Services Tax (GST) is without a doubt the most comprehensive tax-related reform to be seen in India in several decades since it will eliminate the conflicting and cascading taxation structures, which have confounded several industries over the past few decades. It will most certainly have a profound effect on the economy of India.

In the long run, a single indirect tax that covers all goods and services will increase tax collection by making it simple for merchandisers and many other business owners to observe and also curb overall taxation tiers. With that being said, it should be understood that the favorable effects of this new taxation regime will become evident only within 2-3 years of its implementation.

Only time will tell if the effects of GST on real estate are positive or negative as on one hand, the layman is made to believe that the GST regulation will be on the pocket, but in reality, the expenses are going to go up since the sale is usually from the middle and luxury segment. But, on the other hand, experts are also of the opinion that the impact of GST on real estate sector is expected to be neutral under GST. Though still, there is going to be a substantial benefit from GST as it will bring a lot of required transparency and accountability. Builders, developers, and contractors would benefit from many taxes, which will be comprehended by GST. Hence, the real estate sector should be happy with GST even if the rate declared is higher than the current rate.

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