How will GST impact the various segments of Indian real estate?

The Goods and Services Tax (GST) is, beyond doubt, the most revolutionary tax-related reform to be seen in India in several decades. It will eliminate the conflicting and cascading taxation structures, which have confounded several industries over the past few decades. It will most certainly have a profound effect on India’s economic prospects. A single, indirect tax, which covers all goods and services will, in the long run, increase tax collection by making it easier for retailers and several other businesses to comply and also moderate overall taxation levels. That said, it should be remembered that the favourable effects of this new taxation regime, will become evident only within 2-3 years of its implementation. Although the GST tax structure has been announced, there is still a lot of uncertainty about which tax rate will be applicable to the real estate and construction industry. The expectations are for real estate to be in the 12 per cent bracket. However, the GST rate is not the only important factor. The abatement rules, as applicable under the service tax regime and the input tax credit facility for developers, will determine if the effective tax incidence on real estate, is lower or higher under GST. Effectively, the composition scheme allowing for abatement against cost of land to the extent of 75 per cent of the house cost, for residential units priced under Rs 1 crore and less than 2,000 sq ft, makes the effective rate at 3.75 per cent. In other cases, the abatement goes down to 70 per cent, making the effective rate at 4 per cent. This will go a long way, in determining whether GST is tax neutral or tax adverse for real estate. The government has offered some clarity, on the abatement rules for under-construction houses and input tax credit benefits for developers.

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