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How a Single Government Taxing System Will Affect India’s Commercial Real Estate Sector?

Updated: Jul 24, 2023

GST-India’s commercial real estate sector

The Indian government’s uniform tax policy for goods and services across the nation is expected to come into effect from 1 April, 2017. This is good news for several sectors in India, especially commercial real estate. GST or Goods and Services Tax could bring in clarity and unambiguity in the commercial real estate sector, conceivably reduce cost of property ownership, especially if GST rate is lower than current rates put together. Additionally, GST could also lead to lower compliance costs and input costs for builders as well.

Here are the top 3 ways that the commercial real estate sector will benefit from the implementation of the Goods and Services Tax:

1. Reduction of construction and property development costs

Currently, commercial property developers are severely burdened with exorbitant construction costs or debt payments as they do not earn through sale of property but accrue revenue by lease or renting the commercial real estate property after completion, predominantly due to a lack of credit facilities.

The GST will ensure seamless credit disbursement and reduce restrictions on the availability of construction-related credit by diluting multiple indirect taxes. GST will simplify tax compliance and minimize the scope for double taxation. This will give rise to liquidity of funds that will lower costs and overheads in the commercial real estate construction sector.

2. Improved transparency in taxation

Currently, Service Tax and VAT are the main taxes being levied in the commercial real estate sector along with a host of other taxes. The sector is characterized by overlapping tax policies and no fixed rate of taxation. Unavoidably, these overlapping tax policies have led to commercial builders across various Indian states following double standards and malpractices with respect to compliance, leading to persistent disputes.

The eradication of multiple taxes such as VAT, service tax and stamp duty in commercial real estate transactions could streamline the property buying, selling, or renting process for both buyers and sellers. A single GST will also eliminate the tedious process of meeting numerous tax authorities that must be dealt with and combine all tax policy related issues under one authority.

3. Decreased unit costs for commercial real estate buyers

As of now, Service Tax and VAT on the purchase of commercial property (when a project is under construction) is the property buyer’s concern instead of developer’s, thereby increasing the overall cost to be borne by the buyer. In addition to this, the buyer must pay all local and state taxes until he takes final possession. Taxes that developers pay include excise duty, customs duty, taxes on the cost of construction materials, and CST. However, builders easily factor these costs into the pricing of units. Thus, the exaggerated costs discourage buyers from investing in CRE.

Once GST is implemented, developers and buyers alike would have a consolidated and streamlined tax to pay, consequently decreasing the cost of transactions and transfer. The overall rationalization of property prices will benefit buyers. The demand for real estate is expected to go up after the GST is rolled out, improving the real estate and construction sectors as well as India’s economy.


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