The long-awaited revolutionary tax has finally been introduced. GST seeks to transform India with its “One Nation, One Market, One Tax” principle, and all signs indicate that India’s real estate sector won’t be left out of the transformation.
The real estate sector is one of the most pivotal sectors of the Indian economy. It is the largest employer in the economy after agriculture, contributing an average of 5-6 percent to the GDP — a contribution that is set to grow at a compounded annual growth rate (CAGR) of 30 percent over the next 10 years. By one account, the sector will be worth a staggering $180 billion in revenues by 2020.
In the past, the real estate industry was embroiled in disputes due to ambiguity in provisions as well as multiple taxation. GST is expected to simplify taxation compliance and have a positive impact on the industry as a whole.
Impact on real estate buyers & investors
Under the earlier law, buyers were liable to pay taxes depending on the construction status of the property, i.e., whether the property was under construction or complete. When purchasing a property under construction, a buyer was subjected to the payment of VAT, service tax, stamp duty, and registration charges. Properties purchased after completion were exempt from VAT and service tax, and only stamp duty and registration charges were payable. Moreover, the state where the property was located was also a relevant consideration because VAT, stamp duty, and registration charges — all being state levies — varied from state to state.
The biggest takeaway is that GST is a simple tax that applies to the overall purchase price. All properties under construction will be charged at 12 percent of the property value. This excludes stamp duty and registration charges. For completed properties, the earlier provisions will continue and buyers will pay no indirect tax on sale of ready-to-move-in properties.
Impact on developers
Previously, developers were liable to pay customs duty, central excise duty, VAT, entry taxes, etc. on construction material costs. They also had to pay a 15 percent tax on services like labor, architect fees, approval charges, legal charges, etc. Eventually, this tax burden was transferred to the buyer.
Under the new regime, however, the changes in construction costs are not as difficult. For instance, cement will now be taxed at the rate of 28 percent under GST. This is higher than the current average tax rate of approximately 23-24 percent, but a lot of additional taxes charged over the average rate will now be subsumed under GST. Iron rods and pillars used in the construction of buildings are now charged at the rate of 18 percent, which is less than the previous average rate of 19.5 percent.
Furthermore, the reduced cost of logistics will result in a reduction of expenses as well. The input tax credits will also help in increasing profit margins. A developer will be entitled to take input credits on the sale of property under construction against the taxes that are paid by the buyer. All this is expected to bring down the project cost to the developers, and the developers will have to pass on the benefit of the price reduction to the buyer.
Prior to GST, a huge percentage of each real estate project expenditure went unrecorded in the books. GST will cut down this percentage due to cloud storage of invoicing. The real estate sector will also benefit with the new tax law having a positive effect on all ancillary industries since this sector has a stimulating demand for more than 250 ancillary industries.
Input Service Distributor (ISD) concept
Under GST, an ISD concept has been proposed for transferring the tax credit of input services between two or more locations. Any supplier of goods or services can be considered an ISD. An ISD can transfer credit for all types of GST, including CSGT, SGST, or IGST. Further, an ISD can be any supplier of goods or services. Considering the possibility of multiple state registration, an ISD could be used as a tool to ensure optimal utilization of head office related credit, resulting in actual cost reduction. Furthermore, assesse of a reasonable size having ISD facility will have to file 61 returns in a year.
Compliance requirements are bound to increase in the GST era, however, so businesses will need to gear up. All assesses (including composite dealer) will now be required to file annual returns on or before 31st December following the relevant financial year. Moreover, assesses must file annual returns for each registered branch and warehouse. There is a mandatory audit requirement by Chartered Accountant or Cost Accountant where the registered entity’s aggregate turnover during financial year crosses Rs 1 crore. In cases where an audit is mandatory, the annual returns need to be accompanied by a copy of the audited annual account and reconciliation statement that reconciles annual returns audited accounts.
Need for automation
Considering the new compliance challenges for the real estate industry under GST, businesses will need to bring appropriate changes to their IT systems in order to be GST compliance ready. Furthermore, the Real Estate (Regulation & Development) Act, 2016, will usher in an altogether new need for automation.
Automation will provide a huge array of benefits, including timely compliance, report generation, comparison of reports, decision making, cost-effectiveness with reduced staff, technical and online support, and more. Businesses that adopt Avalara’s GST Cloud solution will be in the best position to successfully navigate the challenges ahead.
Avalara is an experienced application service provider (ASP) and partner of authorized GST Suvidha Providers (GSPs). To understand how our cloud-based application Avalara TrustFile GST can help you with GST compliance automation, contact us through https://www.avalara.com/in/products/gst-returns-filing.