With the impending advent of GST, homebuyers are presently jostling with a lack of clarity with respect to several aspects related to real estate. Aspects such as whether the rate of GST will remain equal to the present applicable taxes; whether affordable housing will come under or remain outside the purview of GST.
Taxes such as service tax, stamp duty and value added tax (VAT) are some of the taxes which are applicable when a buyer purchases a house. These taxes would be subsumed by GST when it hits on July 1. We will discuss how GST will impact the real estate sector below.
Service tax is levied on the cost of construction of a house wherein the amount spent on labour is treated as a service rendered by the constructor to the homebuyer. On an under-construction house, the homebuyer is liable to pay service tax on a particular percentage of the total value of the house. This percentage is known as cost of construction. For example, house property worth less than Rs. 1 crore receives 75% income tax abatement; which means that service tax is calculated on 25% of the gross value of the under-construction house.
Value Added Tax
Value added tax (VAT) is charged by a few states like Delhi on under-construction homes. This tax is borne by homebuyers and the tax rate varies between 1 to 5%. However, post GST, the tax structure pertaining to purchase of homes would be simplified. Though, it may have the negative effect of increasing the cost of real estate in states where VAT was not applicable.
Stamp duty refers to a duty or tax levied on legal recognition of certain documents. For example, a homebuyer needs to pay stamp duty to register his/her house property.
Stamp duty will not be subsumed by GST and will continue to exist. Stamp duty is calculated (as a percentage) based on the total value of the property. Stamp duty varies from state to state as well depending upon whether a man or a woman bought the property. For example, if a woman purchased house property in Delhi, she would be charged 4% stamp duty instead of 6% which is charged if the property is in the name of a man. However, if the property is co-owned by both man and woman, stamp duty of 5% is levied.
Under the current tax regime, 8-9% taxes and duties are charged on purchase of a house property after considering abatement rules and state VAT. GST has brought the real estate industry under its ambit by levying 12% tax on works contracts in the under-construction stage. This is exclusive of stamp duty. For example, for an under-construction property worth Rs. 1 crore, a buyer will pay Rs. 8-9 lakhs in tax while under GST, this amount would be Rs. 12 lakh. However, builders can avail input credit under GST regime whose benefit they can pass on to the homebuyers.
Apart from this, the government must lend coherency about the service tax and value-added tax that has already been paid by developers for their under-construction projects. Moreover, buyers who have booked their houses but not yet made payments could be asked to pay at 12% rate by the real estate developers.