The switchover to Goods and Services Tax regime is one of the major tax reforms in the history of India. GST which came into force on July 1st has tried to ease out the complexity of taxation in the country. It has replaced the multiple taxes which are levied by the union and state governments and has subsumed all indirect taxes that includes central excise duty, octroi tax, commercial tax, VAT and service tax. Here in this blog, we will try to understand how GST could impact a potential home buyer.
Dual concept GST
India has opted for a modified version of GST. This version is different from the current GST regime followed globally. Both the Centre and the states will have different roles with respect to taxation. It implies that for a consumer, whatever goods and services he buys, both the governments would levy the tax. Every state would have its own rules. For instance, Maharashtra will follow its own GST rules while Delhi would follow own GST rules. Likewise, the Central government has its own CGST.
Under this new regime, some taxes have been discontinued. From the perspective of the central government’s, service tax, central excise, two portions of customs duty, i.e., special additional duty and countervailing duty and has disappeared and merged with GST. From the perspective of the states, VAT, entry tax, purchase tax, octroi, luxury tax, entertainment tax and the various surcharges, and cesses have been subsumed into GST.
What has stayed?
From the view-point of real estate, stamp duty which is levied by states is still applicable. Basic customs duty (BCD) is still applicable. A cess which is applicable on the customs at 3 % also stays.
Impact of Unregistered dealers
According to the new tax regime, a business person whose annual turnover is below ₹20 lakhs are not required to get registered compulsorily under the GST regime. In case you buy goods or services from an unregistered person than being a recipient you would be required to GST on behalf of the supplier. This is a new move as previously anyone transacting with a dealer who was unregistered, the onus of paying the tax was the supplier if such supplier was below threshold limits, however, now this onus has shifted on to the buyer under the reverse charge mechanism.
Under this reverse charge mechanism if a person does any business transaction with an unregistered dealer, then the person would be required to pay GST within 30 days under this reverse charge mechanism. While in the old system, a person was required to pay service tax services like renting a cab, goods transport by road or legal services. A similar concept has been brought into GST, which refers that for a specific group of services one has to bear GST and claim the credit on it later.
Input tax credit (ITC)
The most relevant aspect of GST is the ITC (Input tax credit). With respect to real estate, GST is charged by the contractors while constructing a house will be credited against GST charge on the sale of such house. There is a composition scheme which is restricted to ₹75 lakhs annual turnover, i.e. turnover between ₹20-75 lakhs. This composition scheme is a straightforward scheme where one is required to pay 1-2 percent on the total invoice value. However, one won’t receive the benefit of ITC. It is a PAN-based turnover though not specific to state turnover that implies all the states put together wouldn’t be allowed to go for the composition scheme, and you are under the normal scheme. It means that you would receive the credit for all input taxes which you would pay and you would be required to charge normal rates of GST that is in force, which is 12 percent currently for real estate.
GST has certain provisions in place according to which any additional credit which a developer receives, he is required to reduce the price by such amount. Based on the similar lines of the CCI (Competition Commission of India), Anti Profiteering Authority of India would take the necessary steps for checking collusion among the businessmen who might not pass on the profits to end consumer. As such, a developer is required to pass on such profits to end consumer else he might have to face the legal consequences contained in the law.
Rule related to Place of supply
The place of supply guidelines would play a decisive role in regulating the precise tax. In case there is a business deal between a couple of parties where whichever goods or services are exchanged for a specific value then the same is part of the definition of supply. Coming to real estate, transactions are the properties which are under-construction. Primarily, for a sale of an under-construction property, GST would come into the picture. Hence, properties which have received their completion certificate or occupation certificate would not come under the purview of GST. However, penalty and interest against delayed payment which is recovered from the buyers would form part of supplies.
Likewise, stock transfers will also attract GST. For example, in case a developer has a project which is going to Mumbai, and he wants to transfer excess cement from this project in Mumbai to his other project in Ahmedabad, he would be liable to pay GST on such stock transfer. No GST is applicable for stock transfers of goods or services within a state.
Before GST, a works contract was a contract that implied supply of both the goods and services. After the implementation of GST the meaning has changed, and now it means any contract that requires the construction of any immovable property, services done to the immovable property, whether its goods or services. A contract that involves moveable goods won’t come under the purview of works contract under the GST regime.
The Bottom Line
To conclude, the price of any property is not determined by taxes alone. There are several other factors which contribute to it including dynamics of demand-supply and policies of the government in force, which play a crucial role in influencing the price of the property.