The GST Impact on Commercial Real Estate

The Goods and Services Tax (GST), launched by the Indian government, has leveled the proverbial “tax playing field”. It has brought a complicated web of taxations under a single, simplified structure and promotes, what we can hope will truly be, a more transparent, fraud-free tax system. Real estate is the second largest industry, generating jobs and income in the country, close on the heels of agriculture, and it accounts for a considerable percentage of the country’s GDP.

In the previous tax system that employed Value Added Tax (VAT) and Service Tax, every contractor and vendor, in the supply and production chain for real estate projects, would apply these charges. However, there were multiple other taxes like octroi charges, entry tax, and excise duty also being levied for the transportation of goods. These taxes have been subsumed by the GST structure. Developers and contractors benefit from these reductions, but the big question is; Will the buyer inherit the advantage as well?

How will GST affect commercial property prices?

In the earlier tax system, buyers were eligible to pay VAT, service tax, stamp duty and registration fees for a property under construction. As the taxes levied varied from state to state, the eventual calculation of taxes applicable was complicated and tedious. This has been simplified with the GST. Under GST, 12% of the property value applies as tax for under-construction projects. For complete, ready-to-use properties, no indirect tax is applicable.

Developers also enjoy reductions in taxes due to the implementation of the Input Tax Credit system. What this does is, it allows developers to redeem taxes paid on purchases, against the tax to be paid on the final product. In an effort to create a fair system, GST law states that this benefit should be transferred to the buyer as well, through reduced prices. To ensure this, the government has introduced an ‘anti-profiteering’ clause as part of GST law, which has been put in place to ensure that developers comply and forward the benefits they enjoy to the final buyer.

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Currently, a major concern with developers is the transitioning of ongoing projects that were under the previous tax system, which is now to be run under GST. No method or specifications have been released by the government with respect to a protocol for the transition, which has left many aspects of the industry in a grey area. Overall reports suggest that prices in real estate are set to drop by 1 to 3%. However, as Stamp Duty and Registration Charges vary for individual states, there are chances that they may be increased to garner additional revenue, offsetting the possible benefits. Experts still maintain that the system is too new to conclusively report on the real changes it will bring about. That, only time will tell.

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