Impact of GST on Real Estate: Study on Tax Structure Changes and Price/Stakeholder Effects, Exercises of Law

Download Impact of GST on Real Estate: Study on Tax Structure Changes and Price/Stakeholder Effects and more Exercises Law in PDF only on Docsity! AMITY LAW SCHOOL TAXATION LAW IMPACT OF GST ON REAL ESTATE WITH REFRENCE TO STACKHOLDER BY ARUN YADAV B.A,L.L.B(H) SECTION-F ENROLLMENT NO:A11911115086 Acknowledgement 1 I would like to express my special thanks of gratitude to my teacher Mr Alok Verma who gave me the golden opportunity to do this wonderful project on Impact of GSt on Real estate with refrence to stackeholder which helped me in doing a lot of Research and i came to know about so many new things I am really thankful to them. Secondly i would also like to thank my parents and friends who helped me a lot in finalizing this project within the limited time frame. 2 tax rates and the new ones for under-construction residential projects, to help resolve input tax credit (ITC) issues. As per the decision taken by the GST Council, the developers of residential projects which are incomplete as on March 31, 2019, will have the option either to choose the old structure with ITC or to shift to the new 5% and 1% rates, without ITC. Builders will get a one-time option to continue paying tax at the old rates (effective rate of 8% or 12% with ITC) on ongoing projects (buildings where construction and actual booking have both started before April 1, 2019, but which will not be completed by March 31, 2019), Pandey explained. The new tax rate of 1% for affordable houses and 5% for others, without ITC, will apply on new projects. On the time-frame for the transition, Pandey pointed out that the council has agreed on providing a reasonable time to developers. The matter would be decided in a next few days in consultation with the states, he said, adding that it could be 15 days or one month. The Council also clarified that projects with up to 15% commercial space will be treated as residential property. This will resolve issues faced in cases where buildings have commercial amenities, such as clubs and restaurants, as well as in case of residential-cum-commercial projects. Additionally, a condition has also been imposed that 80% procurement by developers should be from registered dealers, to avail of the composition scheme. The new tax rates of 1% and 5% shall be available, subject to the condition that ITC shall not be available and that 80 per cent of inputs and input services shall be purchased from registered persons. Any shortfall in purchases according to these norms, would be levied a tax of 18 per cent. Tax on cement purchased from unregistered person shall attract a 28% duty. The meeting deliberated on the transition provision and related issues for the implementation of lower GST rates for the real estate sector. The Council had, in its last meeting on February 24, 2019, slashed tax rates for under-construction flats in the affordable category to 1%. The GST rate on other categories was reduced to 5%, effective April 1, 2019. Pandey said the GST rates for new projects will be mandatory from April 1, 2019. IMPACT OF GST ON REAL ESTATE The construction of a complex building, civil structure, or a part thereof, intended for sale to a buyer, wholly or partly, is subject to 12 per cent tax with full input tax credit (ITC), subject to no refund in case of overflow of ITC. In other words, residential construction services, will invite GST at the rate of 12 per cent, which 5 will apply to developers selling residential units before completion of construction to the home buyers. According to the JM Financial report on GST, for states with non-composite VAT (Karnataka, Tamil Nadu, Andhra Pradesh), the transaction value changes marginally from 10-11% to 12% under the regime. With input cost credits available, developers in these regions may witness improvement in margins in case no price revision takes place (subject to the anti-profiteering clause). Abhishek Anand, assistant vice-president (Equity Research), JM Financial Ltd, explains: “In the current regime, states with composite VAT require developers to pay lower VAT rates on the total property value without any input tax benefit (Maharashtra, Haryana) or partial benefit (intra state offset- Bangalore). Under this regime, developers pass on the transaction cost – VAT (1%) and service tax (4-5%) to buyers (total 5-6%). Developers get offset for only the input service tax component. In the GST regime, the transaction cost increases to 12%, with input credit available on both, services and material. Property transaction costs will increase by 6%, in case no input credit is passed on by developers. If developers pass on the input credit to buyers, the property price increase could be restricted to 1-2%.” If the developers pass on the credits completely and bring down the base prices, then, home buyers may marginally benefit under the GST regime. Nevertheless, stamp duty will continue to be applicable, irrespective of whether the property is under-construction or constructed, in the pre-GST and post-GST regime. TAX STRUCTURE UNDER THE GST In the GST Council meeting held on February 24, 2019, the decision was made to cut tax on under construction residential houses to 5 per cent, from 12 per cent. It was also decided to slash the GST rate on affordable housing, to 1 per cent from 8 per cent, as per Finance Minister Arun Jaitley. These changes are applicable from April 1, 2019. As per industry experts, the elimination of input credit tax benefit may hit profitability for the supply side; however, the potential demand generation as a result of this move will outweigh any possible negative aspects, leading to greater sales numbers and revenues. IMPACT OF GST ON PROPERTY PRICES In the case of a premium properties, while the basic construction cost may come down a little, but as the input tax credit is limited to 12 per cent, it will not be 6 sufficient to bring down the fresh tax liability to nil because of the taxes paid on other expenditures. GST rates for real estate – Input materials HSN Description of goods Rate Chapter 72 Steel 18 per cent 2523 Cement 28 per cent 6802 Marble and granite 28 per cent 2515 Blocks of marble and granite 12 per cent Chapter 68 Sand lime bricks and fly ash bricks 12 per cent 2505 & 2517 Natural sand, pebbles, gravel 5 per cent 8428 Lifts and elevators 28 per cent Data provided by: BMR Under the tax regime, many of the construction materials are under the 18 and 28 per cent slab. For example, steel and steel products, are mostly in the 18 per cent segment and cement and prefabricated structural components for building or civil engineering, are in the 28 per cent slab. However, as the input tax credit is available on products utilised for construction, the overall tax incidence should be neutralised. CONDITION OF STACKHOLDER IN REAL ESTATE Investors are the people who always seek to earn the profit in the process of buying and selling of the home or property in the different areas of the country or the state or city. These are the people who buy the property in the cheap rates or lowered prices so that they can gain the benefit once that property increases its value and worth in times to come. They buy the homes and properties in the large amount and keep these with them in order to sell them at the right time where circumstances go in their favor. Once they see the country or government announces the favorable policies for the real estate industry and increases the property value of the properties and housing scheme, then investors would endeavor to exploit the opportunity and sell the properties they have earlier. This way, they would be able to take the commission or profit out that would be in the shape of the difference between the buying and selling price of the property and home. Their only purpose is to keep buying and selling the home in an effort to earn the profit and money out of that activity. Investors would go towards the specific neighborhood to buy the properties in that particular area or place in order to take the advantage of the potential future value and worth of the property they own now. As the matter of the fact, as per the usual discourse, the value and worth 7 2) Skyscrapers: Skyscrapers are expensive to construct and can only be economically justified when the cost of land is extremely high. Research has shown that the number of skyscrapers being built in an area is a good indicator of bubbles. In India, we see a large number of skyscrapers being built in areas like gurgaon which makes little sense given the sheer amount of open land available. 3) 2014 elections: Real estate has been a great place for politicos to park cash in the past. When the elections come, they need to sell their assets to generate cash to fight the election. 4) Everyone is talking about it: This is probably the best indicator. Everywhere you go, people are talking about how they can or already have made easy money in real estate. Bubbles can only survive till there are still people left who want to get in. When the music stops, the bubble bursts. 5) Current account deficit: India has a significant current account deficit which will invariably lead to currency depreciation. This will stoke inflation which is already around 11%. This limits RBIs options and forces it to maintain a high interest rate. High interest rate = Expensive loans = Lower demand for housing. CONCLUSION The impact of GST on real estate sector is very much likely to be in the hands of buyers as the rate of tax can certainly delight with its economical zone. However, no pre-assumption can be made in the scenario as the real estate sector is a highly volatile industry and can fluctuate with high frequency. The GST regime is intended to replace all multiplication of taxes and the builders will have to pay a larger amount in the 4-tier taxation but would take input credits eventually. The GST will be applied to the materials that is required by the builders for completing the residential projects. So, it will immediately affect the overall cost of building construction. GST will decrease the value of purchasing houses for buyers as they have to pay Service Tax and VAT on purchase of residential unit when booked previous to their 10 completion, developers have to give excise duty, custom duty, CST, Entry tax which is non-creditable tax cost, on their professional side, which is covered in the cost of units. BIBLOGRAPHY ♦ www.mediaindia.eu ♦ www.hrblock.in ♦ blog.saginfotech.com ♦ www.taxguru.in 11 12