How has GST affected the real estate development sector in India?

When the Goods and Services Tax was first implemented in July 2017, it impacted industries and trade sectors exactly as it had in other countries that had implemented this indirect tax system much before India. Overnight, consumers saw an increase in prices, industries witnessed a change in tax rates - some saw a fall while others saw a steep hike in the tax rate that had been followed in the previous regime. This article outlines how GST impacted the real estate development sector in the country.

When GST was first implemented, it had hiked the rate of tax for the construction and real estate development sector from the previous 15% to 18%. However, the GSTN granted deduction based on land value equivalent to one-third of the total amount charged by the developer for GST calculation. So the effective GST rate was actually 12%.

In April 2019, in a bid to rationalize tax rates for the residential real estate sector, the Centre revised the tax structure greatly reducing the tax burden on the end consumer. This was a one time option for ongoing projects where construction as well as pre-bookings had commenced before April 1st 2019. This option allowed developers to continue tax payment at the old rates that were at 8% or 12% with the option to claim input tax credit or pay tax at new rates of 1% and 5% without claiming input tax credit.

One can say this change in tax mechanism forced a hard reset on the real estate development sector in India. The impact of this change in tax structure can be zeroed down to three major areas concerns namely, the rise in litigations under the real estate development sector, the over emphasis on fulfilling compliance requirements and legislation of stamp duty.

A number of applications and appeals seeking advance ruling concerning the real estate sector have seen a significant increase. Consumers are also filing litigations demanding justice in cases of profiteering by development companies. A number of structural changes including change in the definition of affordable housing, applicability if reverse charge mechanism on purchases made by unregistered taxpayers, denial of tax credits and other structural changes in tax policies concerning the real estate development sector have developers tied to a tight leash. Finally, the fact that stamp duty was not subsumed under the Goods and services tax and continues to exist separately under different rates in different states shows that GST is still evolving and real estate developers are likely to face more changes in the future.

While businesses involved in the real estate sector are not too happy with the implementation of the Goods and Services Tax mainly because the tax system mandates fulfilling compliance requirements, its positive impact is already visible to the world. In a recent report by JLL and LaSalle’s biennial Global Real Estate Transparency Index (GRETI) it was stated that India’s reformation and regulation policies and laws including the Real Estate Regulation and Development Act 2016 (RERA), the Goods and Services Tax, Benami Transaction Prohibition (Amendment) Act, 2016, Insolvency and Bankruptcy Code, digitisation of land records etc. have brought about greater transparency in an otherwise largely unregulated sector.