India’s GST: a home buyer’s perspective

April 1, 2016 / By  

The Goods and Services Tax (GST) is the most radical taxation reform that could alter India’s economic prospects. I explore below whether the Bill in itself has positive undertones for the country’s home buyers.

The GST is a comprehensive tax that will subsume most other indirect taxes in India, including Service Tax, Excise Duty, Octroi, and Value Added Tax (VAT). The increasing rate of service tax in recent years is clearly a step towards conditioning everybody for a higher rate of GST in the near future.


Under the Service Tax regime, developers and home buyers can obtain benefits under the abatement scheme. In the case of buying an under-construction flat, Budget 2016 has proposed a standard abatement of 70%, thus bringing the effective Service Tax rate to 4.35%. Additionally, Budget 2016 has announced a zero Service Tax policy for developers constructing flats of less than 30 sqm in Tier I cities and less than 60 sqm in Tier II cities, with the intention of incentivising developers to create affordable housing.

A single indirect tax, encompassing all goods and services, will surely be a welcome change.

Currently, in the case of buying an under-construction flat, a home buyer needs to pay both Service Tax (4.35%) and VAT (1% in Maharashtra, varies from state to state). Additional indirect taxes are paid by the developer during procurement, which get built into the cost of the apartment. Stamp Duty (5% in Maharashtra, varies from state to state) which is payable on property transfers, is not going to be subsumed into the GST.

The direct impact of GST on real estate, in terms of tax outflow for developers and consumers, will depend on whether the final GST rate is more or less than the taxes paid currently. However, apart from the significant reduction in tax management expenses due to a single, unified tax, it also needs to be kept in mind that the real estate sector shares positive symbiotic relationships with more than 250 other sectors, such as cement, steel, IT, BFSI etc. Due to this, the benefits or drawbacks of GST on each sector will also have an indirect impact on real estate and vice versa. Also, real estate is an important sector because it contributes 7.8% to the national GDP, is the 4th largest sector in attracting FDI and is the 2nd largest employment generator, after agriculture.

As a recommendation to the government, while fixing the GST rate, any additional tax burden on the home buyer should be avoided at any cost, because that is the last thing which the industry needs at this point in time.

Current Status of the Bill:
The Bill has already been passed by the Lower House and is pending ratification by the Upper House, where the current government does not have a majority. After it is approved by the Upper House, the legislation needs to be approved by half of the 29 states so as to possibly roll out GST by October 1, 2016. Considering the uncertainty of the multiple deciding factors, it will be exciting to witness whether the government is successful in garnering adequate support to get the Bill passed in 2016.

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