'Realty may attract 18% GST;impact on housing prices neutral'

Real estate is likely to attract a GST rate of 18 per cent and its impact on housing prices would be broadly neutral, rating agency ICRA said.
"Services, which would include works contract, are expected to fall under the 18 per cent slab. ICRA expects that at this rate of GST, the impact of the GST regime on the residential real estate prices will be broadly neutral, with some variation across states due to the divergences in current taxation practices," the agency said in a statement.
In the recently concluded Goods and Services Tax (GST) Council meeting, the finance ministry proposed a four tier GST structure, with a lower rate of 6 per cent, two standard rates of 12 per cent and 18 per cent and higher rate of 26 per cent.

"A GST rate of 18 per cent would be higher than the current effective rate of VAT and service tax for sale of under construction property in most states," the agency said.
The higher tax rate is expected to be offset to some extent by a reduction in the basic price through better utilisation of input tax credits, it added.
Under the current tax regime, certain input taxes paid by the developer, such as excise duty and central sales tax (CST) on materials used for construction, cannot be offset against indirect taxes collected from customers.

However, under the GST regime, there would be better utilisation of these input taxes paid, which can lower the project cost.

Net impact to the end customer will be an interplay between the increment in GST rates over the current effective tax rates and the extent of savings on currently unabsorbed input taxes.
Broadly, the impact is expected to be neutral - some states like Karnataka could see potential savings in the final cost to the end customer, whereas other states like Haryana and Maharashtra could see higher prices.
The main indirect taxes incident on the real estate sector are excise duty, value added tax (VAT) and service tax. These would be subsumed by GST under the new indirect tax regime.

However, there is significant variation in the indirect tax structure across the states due to varying VAT rates and differences in methods for valuing the services and goods portion of the construction contract.
Under the model GST law, it has been clarified that construction or works contract would be deemed to be a supply of service. This brings clarity on the applicability of GST and uniformity in the indirect tax structure across states.
The GST paid by the developers for all inputs such as labour, materials and other services can be taken as input credit and offset with the GST payable by the end customer.

ICRA Vice President Shubham Jain said: "The GST is a positive step towards harmonisation of tax structures across the states and improving ease of doing business for companies.