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GST: A mixed bag for real estate? Prices hike after GST rollout

Jul 05, 2017

The immediate impact of the Goods and Services Tax (GST) on consumers is that they will need to shell out more money for ready-to-move-in flats because developers who have large unsold inventories will need to get them off the block and may try to pass on higher tax burdens to buyers. On the other hand, new flats should cost less. However, under the new regime, effective tax on an under-construction project goes up to 12 percent, that is, increase of 6.5 percent.

Touted as one of the biggest indirect tax reforms after Independence, the GST rollout tries to cut down on a plethora of taxes and their concomitant complexities by an order across industries. However, it will be interesting to see how the simplicity aspect converts into tangible benefits for the eventual consumer and thus India’s famed middle class.

Is simple beautiful? The simplicity factor of GST law

The GST replaces different taxes that the Central and State governments levy separately. Moreover, it allows registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services in other states as part of their normal commercial activity. Merging various Central as well as State taxes into one single tax mitigates cascading or double taxation. Experts are of the view that the simplicity of the tax structure will lead to better and more efficient enforcement and administration. But will that lead to increased coffers or savings for the public?

Expert speak: Opinion varies across the sector

Earlier value-added tax (VAT) and service tax used to be levied at differing rates across states making tax computation incomprehensible for the common man.

“Due to information asymmetry, consumers were largely unaware of how VAT and service tax are calculated – definitely, the entire tax calculation was too complex for lay people to understand. Any real estate product comprises of three expense components, namely land, material, and labor or service costs. VAT is calculated on material cost, and service tax is calculated on labor and service cost. It is very difficult for buyers to ascertain what components were included for calculation of VAT and service tax,” says Anuj Puri, Chairman, Annarock.
He adds: “the implementation of GST makes the calculation much simpler since the buyer has to pay only a single Goods and Services Tax. VAT and Service Tax together accounted for 7-9% of the ticket price for a residential property, which is 3-4% lower than the GST rate.”

“At this point we cannot predict. Construction cost is not likely to come down,” says Shantilal Kataria, President, CREDAI. Prices of flats will depend on different factors such as stage of construction, sale, and amount received, he adds.

This article was first published on LinkedIn by Muqbil Ahmar

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