Decoding tax calculations under GST

Goods and Service Tax (GST) is a two-tier unified taxation system which was introduced by Central Board of Excise and Custom to enhance the future economic prospects of India. Real estate being one of the major contributors of GDP (Gross Domestic Product) as well as employment falls under the ambit of GST. Implemented on 1st July 2017, GST also targets to regulate the real estate sector by removing the current multiple and cascading tax structures.

For instance, GST for real estate transactions are pegged at 18%. However, 1/3rd tax deduction is applicable on the value of land, therefore making the effective rate as 12%. Works contract is classified as supply of service and is taxed at 18% under GST. One of the key nuances of the GST is the Input tax credit which will be available against payment of GST liability at 12%. This input tax credit can be availed on raw materials, capital goods and input service. In case the input credit is not used, it can be carried  forward.

Here is a general overview of a real estate transaction, pre and post GST, depicted in figure 1 and 2. This will give a clearer picture on how taxation has changed in the post GST era. Following are the assumptions considered for  the calculations

Assumptions:

  1. Land Cost is included in the cost of raw materials
  2. Cost of construction comprises primarily of raw material, capital goods and works contract and they have been divided into 55%, 20% and 25% of the total cost respectively.
  3. 80% of the cost of raw materials are covered by – cement, steel, concrete, bricks, sand and building bricks
  4. Average of the taxes on the material is taken as the tax on raw material
  5. Ignoring stamp duty and registration charges as they will remain same pre and post GST
  6. Capital goods are leased. Leasing rate was 5-15% and GST for leasing is pegged at 18% and 28%
Figure 1
Figure 2

With GST in place, a dip of approximately 5-8 % in property prices can be expected. Developers can also carry forward the unutilized input tax credit. Moreover, the time required for the procurement of materials is likely to reduce as GST has impacted the entire logistics sector positively. Under the anti profiteering clause, developers are expected to pass on the benefits of input tax credit to the customer, in terms of reduced prices. Hence, GST is likely to add to the positive outlook of the real estate sector

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