The Goods and Services Tax, one of the most radical tax reform measures since 1991, would be a bumpy ride for the real estate sector, initially, unless the government were to give it special tax treatment The Goods and Services Tax (GST) is one of the most radical tax reform measures since 1991 and is set to alter the way one does business in India.

A single indirect tax, encompassing all goods and services, will go a long way in ushering in transparency, efficiency, and competency in the business environment of the country.

But to make it an effective tool to revive the real estate sector, the government should ensure that tax burden on end users, especially in the residential sector, does not increase because of the implementation of the new system, consultants and developers said.

According to one estimate, the implementation of the new system will lead to an increase in the price of residential units under construction by up to 6%, if the GST rate is pegged at 12%, and by 12% if it is pegged at 18%.GST rate is likely to be fixed between 12% and 18%.

Pratik Jain, leader (indirect tax) at consultancy firm PwC India, said that in the suggested framework of GST, works contract as well as sale of apartments under construction are treated as service.

“The problem is that no abatement is allowed in the GST framework, in lieu of the value of land and other commodities like steel, cement, and sand used for the construction of the structure,“ Jain said. In the existing system, an abatement of 60% is allowed for value of land and other goods used to complete the project.

Service tax at the rate of 15% is levied on only 40% of the total cost.This makes the effective rate at 6% of the total cost. But, under the GST, the tax will be charged at between 12% and 18% on the entire value.

This will clearly increase the tax liability and also the cost, by up to 10%.The impact of GST on apartments under construction would mean that a homebuyer may have to shell out up to Rs 10 lakh more than what he would have paid while booking one that cost Rs 1 crore earlier.

However, there will be no change in the tax liability on completed projects. If you have already bought a flat under construction and the entire payment has not been made, you will be charged tax at the GST rate on the remaining amount due after April 1, 2017, the date that the government is trying to implement this omnibus tax reform.

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, said Anuj Puri, chairman and country head of JLL India.

Puri said that as real estate affects over 250 sectors, the government must pay due attention and special tax treatment to the sector, which will help put the economy on a high growth path.