The real estate sector like other sectors is not immune to the effect of the biggest tax reform, GST and the recently provided list of services that are exempt under Goods and Services Tax includes renting of residential buildings for residential purpose. This implies that the rental income accruing from renting residential property shall be exempted under the new GST framework.
The service is also exempt under the current service tax legislation i.e the service of renting residential premises for residing does not attracts service in the hands of the service provider.
So, how would the changing indirect taxes scenario under GST will effect residential real estate?
Residential property when purchased attracts a service tax depending on the cost of such purchase. For a flat valued over Rs. 1 crore, the rate is kept at 4.5% while for a flat with a cost of upto Rs. 1 crore, 3.75% of the value of the flat is payable as service tax.
Some states including Maharashtra also levy 1% VAT on purchase of flat.
But, with the implementation of GST, 12% tax rate shall apply on the purchase of a residential property. 12% GST rate which includes 6% Central GST and 6% State GST.
So, GST shall bring an additional tax burden of a maximum of 7.25% for a flat costing upto Rs. 1 crore with the new GST rate of 12%. While the existing tax rate calls for 3.75% service tax (for property valued upto Rs. 1 crore) and 1% as VAT (depending on the state's legislation for VAT).
With it the total cost of the residential flat for the buyer shall increase which shall have a direct bearing on the rental charges.
However, it should be noted that with GST, credits shall increase by 2 to 2.5% of the cost of the property in a city like Mumbai as then the developers will be able to avail all the credits on procurements which currently faces several restrictions.