In a country with several complications, not the least of which involve taxes, the Goods and Services Tax (GST) regime has been brought about for one important reason: simplicity. The change from the erstwhile multiple tax regime to GST is one of the largest reforms in independent India, even akin to liberalization in the 1990s.
Simply put, GST replaces a complicated web of multiple taxes namely commercial tax, central excise duty, octroi tax/charges, service tax and Value Added Tax (VAT).
Conceived under the ‘One Nation, One Tax’ philosophy, GST will provide the following key benefits to the economy:
• Eliminate the multiple tax or cascading tax structure
• Create uniform tax rates and structures across the country irrespective of which state business is done
• Make compliance easy
• Reduce tax burden on end consumers
Although far from perfect, the biggest benefit of GST is the introduction of Input Tax Credit where businesses can avail credit of input taxes paid at each and every stage of production. This way, GST is a tax that is levied only on value addition of products and services at each stage. Previously, due to various types of taxes, businesses and consumers had to pay ‘tax on tax’.
What this means is that the end consumer will have to pay GST charged by the last supplier in the value chain. But the key challenge here is to ensure that the benefit of input credit, or tax savings, is passed on to the end consumer. Businesses may well avail of savings and keep prices at the same level and add to their profit. To combat this, the government has added an anti-profiteering clause in the GST bill under section 171 of the GST law. This clause makes it mandatory to pass on the benefit of input credit to the end consumer.
IMPACT OF GST ON REAL ESTATE BUYERS AND INVESTORS
Indian real estate has already been shaken up due to Real Estate (Regulation and Development) Act, 2016, which addresses issues of transparency and accountability among real estate developers and benefits buyers immensely. GST will improve positive sentiments among buyers, but in the short term, prices may not decrease. This is because as GST is new, developers are still dealing with implementation of the new system and will have to crunch numbers over the near future to understand true cost benefits. Once a clearer understanding is obtained, prices may correct.
For buyers and investors of residential property, the biggest benefit is that of a simplified tax structure. Previously, buyers had to pay Value Added Tax (VAT) and Service Tax for under-construction property (other than stamp duty and registration). These two taxes accounted for almost 9% of the ticket price of a residential property. VAT was calculated on cost of materials, while Service Tax was calculated on cost of labour. There was no way for buyers to find out how these calculations were made due to the varying components of materials and labour.
With GST, the tax levy is simple. All under-construction properties will be charged just one tax levy of 12% (excluding stamp duty and registration). It will not apply to ready-to-move in projects since indirect taxes are not applicable to such properties. Also, the affordable housing sector will not be impacted by GST at all, i.e. there will be no GST levied for affordable housing projects.
How do you as a buyer feel the GST will make your life easier? Tell us in the comments.