Explainer: Here's how much you will pay if GST rate on under-construction houses is cut to 5%?

The GST Council now plans to reduce the rate on real estate to 5 percent. A decision on this front is expected today

2017 is best remembered for ushering in a regulatory mechanisms into the realty sector, especially with the passage of Real Estate (Regulation & Development) Act, 2016 and the new tax regime: Goods & Services Tax (GST).

What is GST?

It replaced a plethora of age old 17 central and state taxes and 26 cesses. GST was seen as a tax that would liberate the taxpayer from the evils of cascading, multiplicity of levy, unwarranted litigation, compliance burden, among others.

Real estate and GST
One sector that was looking up to GST as a panacea for all its tax woes was real estate. It expected GST to provide some impetus to the sector by liberating it from hidden taxes, black money, multiple assessments, audits and tax procedures. GST was expected to make the paradigm shift from favouritism to transparency and from discretionary administration to a policy and system-based administration.

GST and immediate impact

Regulations imposed by the government to ensure accountability on the developer such as the Real Estate (Regulations and Development) Act, 2016 (RERA); Goods & Services Tax Act; and the Benami Transactions (Prohibition) Amendment Act, 2016 all discouraged speculators and laid the foundation of a healthy end-user market

In the last two years since its introduction, GST has been a major factor keeping homebuyers away from under construction apartments. Many developers are now willing to absorb most of the GST impact on buyers in under-construction projects to boost sales, particularly in the low-ticket size apartments and in the affordable segment.

GST and under-construction properties

Currently, GST is levied at an effective rate of 12 percent (standard rate of 18 percent less a deduction of six percent as land value) on premium housing and effective rate of eight percent (concessional rate of 12 percent less a deduction of four percent as land value) on affordable housing on payments made for under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale. However, GST is not levied on buyers of real estate properties for which completion certificate has been issued at the time of sale.

The GST Council now plans to reduce this rate, with many anticipating it to be reduced to five percent. A decision on this front is expected on January 10.

“If the government reduces the eight percent GST rate on affordable housing to five percent without extending the benefit of input tax credit, sale prices may increase and real estate developers may pass on the burden/increase in price of apartments for most low and middle income projects. This may impact the government’s affordable housing scheme,” said Harpreet Singh, Partner, KPMG.

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