Impact of Goods & Service Tax (GST) on Real Estate

Akshat Shah[1], Bhargav Tewar[2]

[1]
Research Scholar, Faculty of Technology, CEPT University, Ahmedabad
E-mail : akshat.4813@gmail.com
[2]
Assistant Professor, Faculty of Technology, CEPT University, Ahmedabad
E-mail: bhagav.tewar@cept.ac.in

ABSTRACT

Goods and Service Tax (GST) has been implemented since last nine months. It has affected many
sectors and Real Estate is the second largest sector in India so it has highly affected this sector. There are many
new Acts/Rules came along with GST. To clarify Each and every rule and its impact on real estate sector this
study is important. The main focus of the study is contract based projects in real Estate. And the scope of the
thesis is only buyer and developer. So to study market scenario personal interviews were taken of total 16
developers. After that 5 case studies are taken to justify the objective. This study highlights on the effect of
the new rules to Residential project in Ahmedabad and its impact on construction cost, selling price, Land
cost, Ratios etc.

Key words - GST (Goods and service tax), Construction cost, Selling price, Real Estate, Developers and
buyers.

Introduction implemented in different reforms like RERA (Real

On 1st July, 2017 (00:00), India had a historic
moment with launch of GST (Goods and Service
Tax) in the centre-hall of parliament. This time
India was getting independence form cascading
taxes, complex tax system and paving the path for
economic dynamism. Previously India had a
complex tax system involving several taxes – direct
and indirect. In that scenario, Goods & Service Tax
(GST) is regarded as one of the most path breaking
tax reforms of independent India. This
transformation of tax is tagged by “ONE NATION,
ONE TAX”. It is expected that GST will help in
reducing the tax burden on goods and services.
1. Need of the study
The Real Estate sector has strong economic
multiplier effects through backward and forward
linkages. Construction is the 2nd biggest
employment generator in the county after
agriculture and accounts for a significant
proportion of the GDP. The Real Estate sector
contributed 7.4% of India’s GDP in 2017-181.
Under the previous system, the Real Estate sector
had been in disputes due to ambiguity in provisions
as well as multiple taxation.
GST is biggest tax reform in India since
independence, and in Real Estate sector it will
surely impact buyer, seller, intermediary, financer,
investor etc. There are many new rules
Estate Regulation Act), GST (Goods and Service
Tax), etc. There are many new rules/laws/acts
which are directly affecting Real Estate sector, so
it is very important to study some rules and to have
conclusion out of that study. It is also important to
study theoretical impact and market scenario to
understand how exactly it has impacted the
particular sector.
2. Objective, scope and methodology
This study began with review of literature
related to the topic. An opinion survey was carried
out independently with the stake holders, to know
their view on change in real estate . A total of 16
opinions were taken from developers. This data
was then analysed to get conclusion of the study.
a) Objective
The research objective was to study impact of
GST on real estate sector in ahmedabad city and to
study real esatate transaction between buyer and
developer.
b) Scope
The scope for the study included the study of
impact of GST from construction cost, selling cost,
and land cost and also study of method to pass on
benefit of Input tax credit to buyers by developers.
The study is only limited to the projects which
are given on contract bases.

1
Source: Economic Survey 2017-18 (www.pib.nic.in)
c) Methodology
Goods &
Initially, the need, objectives and scope of the Service Tax
thesis were identified. (GST)

After that, literature study was done for the new

GST law. It was done so that GST can be SGST CGST IGST UTGST

understood from the start and specifically for Real

Estate sector. Then tax rates in GST were compared
The above chart is a basic concept of GST.
with the previous taxation system in order to get
more details. The following terms in GST is very important to
know:
Then for data collection of the case studies, it was
important to create a criteria list for choosing and Determination of natature of supply, time and value
selecting case studies. So after defining sampling of supply, input tax credit, underc onstruciton
frame and type of survey, it was important to do a flats/units, immovable properties, sale of
pilot survey to get a better idea for the main survey completed flats-reversal of input tax credit, anti-
of this study. profiteering act.
In data analysis, interviews were analysed and on Tax slabs in GST are 0%, 5%, 12%, 18% , 28%. In
the basis of the outcome/findings of that, 5 projects which half is of state government and half is of
were compared. Analysis of basic data like total central government.
construction cost, total construction area, GST paid
by buyer, selling price of a unit, total GST paid by
developer, the difference of GST, analysis of the
method of benefit passed on to buyer as per the
anti-profiteering act, etc. was done.
And at last conclusion for each objective was stated
with reference to case studies.
3. Literature review
India has mainly two types of taxes known as direct
taxes & indirect taxes. Previous taxation system
had 14-15 different types of indirect taxes in which
some taxes were levied by state government and
some were levied by the central government. The
taxes levied by state and central government are as
following:

The above table shows the comparison of taxes

In previous taxation system the issues were unclear
laws, multiple taxes on same product, narrow tax
coverage, tax evasion & too much compliance
burden.The idea of GST was based on Source to
destination based taxation system, Charge of
taxation-multiple to single supply, Upfront
exemption to refund mechanism, Simple indirect
tax structure/ Removal of cascading effect of taxes.
Full credit of Input taxes.
between previous taxation system and GST.
4. Data collection
Data collection mehtod used for this study is only based
on primary data. And the data colleciton for this study
is as following:
Pilot Survey – Since GST is recent development,
pilot survey was carried out to lay down the path of
the thesis. In pilot survey, total 3 developers
working in this sector for atleast 15 years were
interviewed. Pilot survey was useful to decide
sampling frame, defining case studies, preparing
questions for the interviews. Since this topic is very
subjective, the data collection method chosen after
pilot survey was Personal Interviews.
Survey Method – Survey method was decided as
personal interviews to get better idea of market
practice from developers. The answers of each
question need to be asked was very subjective so it
was not possible to make a survey form with 3-4
options given in each question. As it is very new
topic, everyone has different views on it. So based
on that, survey method was decided as personal
interviews. According to the pilot survey there
were mainly two kind of professionals included in
sampling frame.
Sampling frame: According to the pilot survey
there were mainly two kind of professionals
included in sampling frame:
Developers / Real Estate Builders
Charted Accountants (Having Real Estate client)
1. Reasons to include developer - To know the real
change after GST & to get comparison of Pre-GST
& post-GST, to know how exactly Real Estate is
affected due to GST, to get case studies to know
real market practice.
Selection criteria – Developers who are having
experience in this sector at least for 10 years, who
has been working as a developer at least for 5
Years, who has completed min. 5 projects & 1 after
GST.
2. Reasons to include Charted Accountant (CA) –
To get knowledge how exactly the real estate
transaction works, to know the real laws regarding
GST particularly on Real Estate. & theoretical
impact of GST on Real Estate.
Selection Criteria – Who are working with Real
Estate developer atleast for 5-6 years, who has
currently min. 3-4 clients in Real Estate & must
have studied GST.
Case Studies – Case studies were identified on the
basis of answers given by developer in personal
interviews to analyse their answer with real case
study in market and more than 3 case studies are
taken so that the result can be avg. out.
5. Data analysis
Following are the responses given by 16
respondents in ithe personal inteview:
Impact of GST on sales volume: Most of the
respondents have voted for neutral response on this
question. One of the reasons for choosing this
option was less time period since GST is
implemented. According to them they haven’t seen
such a big impact of GST in such a short time.
Other respondents who have voted for pessimistic
are having opinion that GST is one of the reason
they are not getting clients these days. And the rest
respondents who have voted for optimistic are
satisfied with GST in Real Estate.
Savings in terms of cost in transition phase of
pre-GST and post- GST: Majority of the
developer felt no change in cost in the transition
phase. 5 out of 16 developers said that they got
benefit of 5-10% during the transition phase as they
ordered the material before GST but the bill was
dated after GST. And 2 out of 16 developers were
in favour of less than 5% benefit.
If 12% GST is reasonable or not in Real Estate
sector: GST on Real Estate sector is 18%, but 1/3rd
is cut because there is no GST on land so effective
rate of GST on Real Estate is 1/3rd of 18% which is
12%. Out of the 16 respondents 15 were in favour
that 12% effective rate is not reasonable, as they
were suggesting that rather than keeping it 12% and
after that passing on the benefit to buyers, keep it
low as 5%. It is very difficult to decide the exact
percentage of passing on benefit to buyers and it is
also a difficult calculation. So they were in favour
of “Not Reasonable”.
Changes in prices in last 1 year on offer in Real
Estate due to GST: Out of 16 Respondents, 12
were in favour of Reduction in Prices, 4 in favour
of Prices remain constant. As there is change in Tax
slabs on each and every materials the reduction has
been seen clearly and the main role played in this
scenario is ITC. Not a single developer felt that
there will be any upward revisions in prices, small
developers stated that there was difficulty in
achieving sales so there was no question of an
increase in prices. Change is prices does not
include the change in prices of land.
Data analysis of case studies includes:
1. Probabilities of Units sold before OC (In
percentage).
2. Applicable GST paid by developer (Works
Contract).
3. GST applicable for the buyers according to
the probabilities of units sold before OC.
4. Total GST paid by buyers in each
probability.
5. Additional ITC which developer can pass
on to buyers.
6. ITC which are forwarded to the buyers in
%.
 7. Breakeven point from each case study
which suggest min. booking should be done
before OC.
8. Finding of formula from all the case studies
with use of deviation.
The breakeven point for each case study has been
derived which shows % of units must be sold befoe
OC to pass on the benefit of ITC to buyers.
Affect of COnstruciton cost and selling cost ratio
to % of units to be sold before OC is as following:
The above chart shows relation between % of units
sold before OC and construction cost : selling cost
ratio. According to the chart as the ratio of
construction and selling cost increases then % of
units to be sold before OC also increases.
6. Conclusion
The main aim of this study was to get knowledge
of the new GST implemented particularly to the
Real Estate sector. The scope of this thesis is
narrowed down to developers and buyers. So the
focus was totally on Effect of GST on developers
and buyers due to GST.
By doing literature study it has been observed that
many new things came along with new GST for
each and every sector. As being the 2nd largest
sector in India. The Real Estate sector is highly
affected due to new Rule and regulations.
In GST the most promising acts are “Anti-
profiteering Act”, “No GST on immovable
property” and “Input tax credit”. By understanding
this two act and relating it to the Real Estate sector
we can easily find the theoretical impact of GST on
Real Estate sector.
From the interviews of 16 different developers, it
has been observed that due to GST there are mainly
2 kind of negotiation happen in the market and the
type of negotiation is of 2 types: 1. Discount on
quoted prices. 2. Discount on GST charges.
After taking case studies of 5 different projects
which includes residential projects including
affordable housing project the output is very clear.
The analysis of this 5 case studies shows pattern of
breakeven point for any developer when he has to
pass on benefit to ITC to his buyers. The average
breakeven point of 5 case studies is 53.34%.
Considering other factor which also affect this
conclusion is ratio of construction cost and selling
cost. So, the analysis shows the relation and pattern
from each case study between the above ratio and
% of units sold before OC. According to the case
studies, it has been observed that in the increase of
construction cost and selling cost ratio, % of units
to be sold before OC also increases respectively. So
it can be said that construction cost and selling cost
ratio affect no. units to be sold before OC
proportionately.
7. References
 Quick connect – GST and Construction
sector by CA Sandesh mundra
 M. Sehrawat, U. Dhanda (2015), “GST in
India: A key tax reform”, “International
journal of research granthaalayah”, vol.3,
issue 12, December 2015.
 http:// www.taxguru.in [12] Hindu
Business Line [13] Custom department
 Reference on Goods & Services Tax by
ICSI
 Pinki, SupriyaKamna, RichaVerma
(2014), “Good and Service Tax: Panacea
For Indirect Tax System In India”,
“Tactful Management Research Journal”,
vol.2, Issue 10, July2014
 N. Kumar (2014): “Goods and service tax
in India- A way forward”, “Global
Journals of multidisciplinary studies”,
vol.3, issue 6, may 2014.
 P. chaurasia, S. Singh, P. Kumar Sen
(2016), “ Role of Goods and Service Tax
in the growth of Indian economy”, “
International journal of science technology
and management”, vol.5, issue
2,February 2016.