A brief introduction to Goods and Services Tax:

With the implementation of GST in India, complex tax system underwent a refinement. Multiple taxes charged by both state and central government got absorbed with all the other indirect taxes, which includes VAT (Value Added Tax), commercial tax, service tax and central excise duty.

Tethered to the idea of a singular tax system for the entire country, the move is dismantling the previously predominant cascading structure of taxes. Furthermore, it is paving the way to uniform tax rates and easing compliances. At the other end of the line, it eventually aids in deducting additional tax burdens levied on the consumers.

Establishing Input Tax credit is the greatest change ever made under GST, wherein it is now a tax based only on value addition at each phase. To elucidate, credits of input taxes paid at every stage of service or production is availed in the subsequent phases of value addition. Emphasizing more, it reveals that the end consumer bears the GST levied by the last service provider/ dealer in the chain of supply. An anti-profiteering clause in the bill under the GST law ensures that all the benefits are passed on to the end consumer from developers, manufacturers and service providers.

Direct impact on residential realty sector:

There have been emerging transformation measures in the realty sector recently. Implementation of RERA (Real Estate Regulation and Development Act) helps in addressing the problem of non-transparency, thereby allowing only accountable builders and developers. Following the implementation of GST, buyers of property and the developers are receiving the advantage of a simple tax structure with accountability at each phase of the process.

How are end consumers benefitted?

The first and foremost advantage for an end user is that they get to enjoy a transparent tax system that is simple. Under the bound of GST, all properties which are undergoing construction are charged at 12%, excluding stamp duty charges and registration fee. Anyhow, the same is not applied to ready to move in projects and completed projects as there are no applicable indirect taxes involved here.

The combined value of VAT rates and service tax rates used to account for up to 9% of the property’s ticket price, which was lower than the rate under GST. And buyers were unclear on how these were calculated because of its complexity. A realty product has 3 vital components namely land, material and labor/service costs. While VAT is estimated based on the material cost, service cost is estimated based on the labor/service cost. This made it hard for the buyers to assure which components were incorporated for VAT and service tax evaluation. Implementing GST made this simpler as the end consumer has to pay only a single tax. Like stated before, here the builder passes the benefit of reduction of price due to the input tax credit to the end consumer.

However, it seems that the affordable housing sector is not touched by the spectrum of this transformation. The Finance Ministry has expressed that there will be no GST for projects that fall under the affordable housing scheme.

How are the developers benefitted?

Even developers were burdened with multiple taxations in the previous system. With multiple taxations on the purchase of materials, custom duty charges, excise duty, central sales tax and so on, the final burden was carried over to the end consumer/buyer.

GST dismantled all this and the perk of being allowed to claim input tax credits is enhancing the profit margins of the developer. A leading developer in Chennai with new flats for sale in Chrompet, indicates that most of the construction materials have not seen a visible transformation in the tax rates, however a slight change in the percentage values of every separate component make a significant difference with the reduction of logistics and transportation cost in the singular taxation system.