Making GST an Enabler of Real Estate Growth in India

India is one of the fastest-growing economies in the world and is expected to become the third largest by 2027, with a gross domestic product (GDP) of USD 5 trillion. Among the various sectors contributing to this growth, real estate is projected to contribute 13% to the country’s GDP by 2025. The Goods and Services Tax (GST) has emerged as a disruptive force, fundamentally altering the industry’s dynamics. India’s real estate sector is especially vulnerable to legislative changes, and GST is no exception. It attempts to simplify the tax system by integrating multiple indirect taxes such as Value Added Tax (VAT), Service Tax, Central Tax, Excise Duty, and several other state taxes into a single system. However, reforming the tax structure by simplifying the taxes in the real estate sector has been multifaceted and complex. 

Before GST, real estate developers had to navigate a labyrinth of taxes. The GST rate for under-construction properties, set at 12% with a benefit of input tax credit (ITC) available for developers, proved beneficial for the industry. The ITC mechanism helped the developers offset the GST on capital expenditures like cement, steel, and other construction materials against the GST charged to buyers. This was expected to reduce the overall tax burden and reduce project costs. But the ground realities have been different. Removing certain pre-GST benefits, such as concessional rates on raw materials and exemptions, has eventually led to higher capital expenditure for the developers.

Complex structure stalling transfer of benefits to consumers

During the early implementation phase, the real estate sector slowed as both developers and buyers coped with the new tax structure. The complexity of GST compliance, combined with the transfer from the old tax system, caused project delays and a cautious approach from investors. However, the promise for a simplified tax structure and potential cost reductions is being tested. The confusion and lack of clarity regarding GST’s application to real estate transactions led to apprehension among the developers. The government’s decision to reduce the GST rate on under-construction properties to 5% (without ITC) for luxury housing, 12% on commercial (without ITC) projects, and 1% (without ITC) for the affordable segment further complicated the cost structure. The intention of reducing the rate of GST to 5% and 1% without ITC to increase the affordability of property for a middle-income section of society has had significant implications. 

Consider the case of a developer in Bangalore working on an affordable housing project. With a reduced GST rate of 1%, the construction cost is ostensibly lower, making the product more affordable for buyers. But the inability to claim ITC means developers cannot offset the GST paid on the inputs such as raw materials and services, potentially translating into increased cost of construction, that may be passed on to the homebuyers directly or indirectly, mitigating the expected benefits of ‘affordability’ of the property prices. The discrepancy in the exemption of GST on the completed, ready-to-move-in projects and land but levying so on under-construction projects has affected the sales of the latter. The dual tax regime creates inconsistencies and adds to the cost burden on the homebuyers. 

Higher tax burden on consumers for rentals

Each real estate segment – residential, commercial, retail and industrial – faces unique challenges. Retail specifically has two GST impacts: one on products and services and one on rental income. This dual taxation complicates pricing systems and affects consumer spending. The discrepancy in levying GST on leasing and renting also takes a toll on consumers as commercial properties charge an 18% GST on rent, which can significantly impact firms leasing office space. This tax burden can be especially difficult for small and medium-sized businesses (SMEs) with limited financial resources. 

The intricate relationship between GST and the real estate industry highlights how important it is to develop and adapt continuously. Through the utilisation of GST potential and the resolution of existing challenges, the real estate industry might potentially advance towards a future that is more efficient, transparent, and economical for everybody. While real estate players need to be aware of the dynamic compliance practises to navigate the GST maze with ease, it is time for the government to improve the tax system and fix existing flaws for the benefit of GST to reach the intended beneficiaries. To realise the potential of the Indian real estate sector fully, it will be crucial to ensure the GST system develops alongside the sector to make sure it is a growth engine rather than a confusing barrier.