Impact of GST on Real Estate

New GST rates have come into effect for residential real estate right from the 1st of April 2019. The GST is to be charged at 5% without Input Tax Credit (ITC) on residential properties that are not part of the affordable housing segment and at 1% without ITC on residential properties that are included in the affordable housing segment.

For under-construction properties 12% GST is to be charged while it does not apply to the sale of completed properties (where completion certificate has been issued) or to the resale of old properties. Under GST, construction costs are significantly reduced for the developer as multiple taxes are not there and due to the availability of input tax credit. A reduction in the cost of logistics will be an added benefit. Hence developers may see improvement in margins. Builders receive an input tax credit on the materials purchased from suppliers/contractors and under the current GST structure pass it on for the home buyers to profit. As this has not happened so far there may be changes in the GST scheme with respect to Kerala real estate in the future.

Before GST came into effect, multiple taxes were applicable to Kerala real estate like VAT, stamp duty charges, registration charges and service tax with different rates and also varied from one state to another.

With the implementation of GST on real estate, the taxation of Kerala Real Estate has simplified and can range from 5% to 18% depending upon some key factors. 

Benefits of the GST Rate cut on Residential Properties

The reduction in GST rates on real estate are expected to provide the following benefits:

• Simpler tax structure which will tend to greater compliance from builders.
• The fair price of the property for buyer due to GST rate reduction to 1% on residential properties in the affordable housing segment.
• The interest of buyers gets protected as the problem of ITC benefits not getting passed to property buyers is eliminated. 
• Better pricing of flats in Kerala as the problem of unused ITC being added to project cost is eliminated.

As a single tax rate of 12% is applicable on properties under construction while GST is not applicable on completed or ready to sell properties buyers will benefit from the reduction of prices under GST. They can wait to gain more understanding of the impact of GST on property prices and put on hold their buying decisions for a better price. Also, GST implementation will have a positive impact on buyers if the benefit of input tax credit received by the developer is passed on to the buyer.

The year 2019 projects to be a better year for Kerala real estate industry as demand for both commercial and residential real estate is expected to pick up. Sales of flats in Kerala are expected to increase by 16% and the demand for commercial office space is also set to rise. All in all, GST in real estate is going to have a positive impact.