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The Easy Guide To GST Calculations In The Real Estate Sector

Aashish

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Understanding GST

The Goods and Services Tax (GST) was introduced by the Indian government to boost the ease of doing business in India and improve the global rankings. GST is an indirect tax that has replaced all other forms of indirect taxation in India. It is a comprehensive tax module that charges taxes based on the value additions in multiple stages. The main objective of this taxation system was to remove the cascading effect of the tax, that is, the tax charged on the tax amount already included in the price of goods and services sold.

On 1st July 2019, the Goods & Services Tax Act came into effect and changed the business landscape for good. The tax was introduced on the principle of one-tax for the entire nation. There are three nodes of this taxation system; the central GST, the state GST and the integrated GST. Intra-State (within states) sales are eligible for both the central and the state GST whereas the Inter-state (between two states) sales are eligible for an integrated GST.

GST in the Real Estate Sector

The real estate sector is one of the most crucial economic growth simulators for any nation. The real sector that accounts for 6-8% of India’s GDP has a major role to play in the nation’s economic health. There has been a significant positive impact of introducing GST into the real estate sector. The real estate sector is considered as a safe investment option by the majority of Indians, and the residential property segment has witnessed a fairly large influx of investments over time.

The recent change in GST rate for residential properties (non-affordable housing segment) that came into effect from 1st April 2019 gave a major push in investment towards the real estate sector. The implementation of GST on property has simplified a lot of taxation hassles that were present earlier. The GST applicable to the real estate segment ranges from 5% to 18% depending on some crucial factors. Let’s peep into the impact of these recent changes on the real estate sector and how it has changed the tax estimates.

  • GST levied on residential properties in the affordable housing segment: 1% without Input Tax Credit (ITC)
  • GST levied on residential properties in the non-affordable housing segment: 5% without Input Tax Credit (ITC)
  • GST levied on commercial properties: 12% with Input Tax Credit
  • GST levied on under-construction properties: 12% with Input Tax Credit

The affordable housing category was redefined with special parameters to classify as affordable housing. The properties under this segment were divided into three categories:

  • For metropolitan areas like Delhi NCR, Kolkata, Chennai, Hyderabad, Bangalore and Mumbai Metropolitan Region (MMR) the total carpet area of properties should not exceed 60 square meters.
  • For other non-metropolitan cities, the total carpet area should not exceed 90 square meters.
  • The total value of the property for both metropolitan and non-metropolitan category should not exceed Rs. 45 lakhs
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GST Charges for Construction Materials

A lot of raw construction material goes into building a property, and the final value of the property reflects the cost of raw materials used. Since GST is charged on a multi-stage value addition basis, it is also applied to the cost of construction materials required to build a property. Let’s delve into the GST rates levied on some key real estate construction materials.

  • GST levied on roofing tiles: 5%
  • GST levied on natural sand: 5%
  • GST levied on building brick: 5%
  • GST levied on fly ash blocks: 5%
  • GST levied on granite blocks: 12%
  • GST levied on refractory bricks: 18%
  • GST levied on bamboo flooring tile: 18%
  • GST levied on glass for construction: 28%
  • GST levied on Portland/ Slag cement: 28%
  • GST levied on granite other than blocks: 18%
  • GST levied on crude granite or marble rubble: 5%
  • GST levied on wall-coverings and wallpapers: 28%
  • GST levied on ceramic, support tiles and fillers: 28%
  • GST levied on prefabricated structural components for buildings: 28%

GST Charges for Construction Services

Other than raw materials, there are construction workers and builders who are involved in the process and provide their services in the process of construction. These services are also a part of the real estate industry. Let’s peep into the GST rates applicable for construction-related services and see how they vary.

  • GST levied on under-construction properties (included under Credit Linked Subsidy Scheme): 8%
  • GST levied on under-construction properties (not included under Credit Linked Subsidy Scheme): 12%
  • GST levied on the composite supply of work contracts for affordable housing: 12%
  • GST levied on the composite supply of work contracts to government agencies: 12%
  • GST levied on the composite supply of work contracts (not included in government agencies or affordable housing): 18%
  • GST levied on work contracts (non-government bodies): 18%

Input Tax Credit for the Real Estate Industry

Input Tax Credit is a tool using which taxpayers can get a rebate on the additional tax paid for goods. It is introduced to remove the cascading effect of tax that we talked about earlier. In the simplest term, the Input Tax Credit can be explained as removing the taxes paid on inputs from the taxes to be paid on the final output. ITC can be claimed on a wide range of inputs used in the construction process by the real estate developers.

This could help the builders to reduce the price of the property for the final customer. This benefit was, however, not fully incorporated by the builders. One of the major disadvantages of GST is that the benefit of this taxation system is not fully passed on to the final customer, like the Input Tax Credit availed by developers is not reflected in the property prices.

The real estate developers also face challenges while availing Input Tax Credits when it comes to thoroughly analyzing the wide range of input costs individually. The problem is not just limited to this, the cost of materials used in the construction process can fluctuate throughout the construction cycle, and calculating ITC for the inputs can get very complicated. Also, there is no mechanism in place to exacerbate the increase in non-GST costs, whereas the benefits of ITC are only limited to the GST paid.

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