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  • GST Impact on Home Loan

    The GST has been introduced on and from July 1, 2017. Instead of various kinds of taxes like local, state, central, etc on home loan, now there will be only one type of tax. This tax will be known as GST or goods and services tax.

    • Real estate will also be considered under the realm of goods and services tax.
    • Goods and Services are going to be taxed at the following rates - 0%, 5%, 12%, 18% and 28%.
    • There will be no GST levied on ready to move in houses.
    • However, GST will be applicable on the under-construction properties. The effective GST stands at 12% for under-construction home loans.

    GST Impact on Construction or Renovation of a House

    Before the implementation of GST, the contractor’s costs included heavy occurrence of Entry Tax, Central Excise Duty, and Central Sales Taxes on the material and Service Tax on the services used at the time of construction. This is eventually passed on to the customers.

    Under the Goods and Services Tax regime, contractors will have to pass on benefits of the lower tax burden to the customers. Contractors will stand eligible for GST credit paid on services and materials used for construction.

    The effective Goods and Services Tax (GST) rate on the under-construction properties will be 12% and not 18%. This is due to the reduction in cost of land. President of CREDAI, Jaxay Shah stated that effective GST will stand at 12% and according to the law, the developers will be passing on the input tax credit benefits to the buyers.

    The Government of India has levied a GST rate of 18% on the renovation sector. However, the value of the land has been removed from tax computation. Due to the abatement of land value, the effective rate comes down to 12%.

    GST Effect on Home Loan EMIs

    While most of it is just prediction, it will stimulating to see how the GST actually affects on home loan EMIs.

    • It will make the equated monthly installments (EMIs) cheaper for people with home loans for the under construction properties.
    • GST levied on home loans is 18% across the country. Service tax and VAT are no longer applicable.
    • The rate of interest has gone up significantly. Lenders and banks will increase the rates associated with the home loans.

    No Additional Burden on Home Buyers Under GST

    Goods and Services Tax (GST) is the headlines for quite a while now. Since its implementation, citizens have asked numerous questions about the pros and cons of this scheme. One such question was if homebuyers be burdened under the new taxation system.

    Titbits About the Effect of GST on Landowners

    • Property prices for affordable housing will not increased under the new GST rule.
    • The GST for properties that are under construction is 18%. However, the effective tax comes to 12% as the builders will be given a chance to enter tax credits.
    • Ready-to-move-in flats may be expensive under the new GST regime. The builders will have to bear the tax burden for flats that are already built.
    • The benefits of investing in under-construction properties will outweigh the benefits of investing in ready-to-move-in homes under the new Goods and Services Tax (GST) regime.
    • Landlords will not be burdened under GST as those who have given their property on rent for residential use will not be charged any GST.
    • As far as renting a property for commercial purposes, landlords will have to pay 18% GST- only if their annual income through rent is more than Rs.20 lakh.
    • The prices of properties are expected to reduce as before the implementation of GST, developers were paying multiple taxes and other charges which would come to 20% to 25% of the total cost of materials they buy. However, under the new GST rule, the tax will be between 12% to 18% which will greatly help in reducing the producing cost incurred by the developers. This gives them an opportunity to reduce the price of the property.
    • In the real estate sector, GST has eliminated about 16 major levies and taxes and has replaced by a single GST.

    To conclude, the implementation of GST will make our current economic condition transparent and will eliminate double taxation.

    GST Impact on Immovable Property Rentals

    Under the Goods and Services Tax Regime, renting of an immovable property is a part of schedule II. The GST rate applicable on it stands at 18%. However, according to the Exemption Notification, the services are exempted by way of residential house renting for residential purposes. This means, if there is a residential property leased out for commercial needs, then exemption will not be applicable. Rental income from such a residential property will be taxed under the GST regime.

    Interstate Supply or Intrastate Supply?

    As far as the services are concerned, the concept of interstate supply and intrastate supply are new. Before Goods and Services Tax was implemented in the Indian economy, service tax was a part of the Central Tax. On services, no State Tax was levied.

    With the new tax infrastructure in place, it is important that distinguish the supply of services into intrastate supply and interstate supply. Let us understand how supply of services is classified into intrastate and interstate.

    ‘Location of supplier’ and ‘Place of supply’ are the two coordinates that must be established. If these coordinates fall in 2 different states, then the supply will fall under the interstate category. However, if both coordinates fall under the same state, the supply will be under intrastate category.

    Now, let us understand how this is going to affect the immovable property rental. Let us consider that a landowner is located in Mumbai and owns an immovable property (commercial) in Delhi. The landowner has rented out the immovable commercial property. The question in hand is whether the owner of the land get registered under GST in Maharashtra or Delhi.

    As per Section 12 (3) of the IGST Act, the place of supply of the service with respect to an immovable property will be the location where the property is located. In this case, the place of supply is Delhi as that is where the property is located.

    Section 2 (15) consists of four clauses – (a), (b), (c) and (d). These clauses determine the service supplier location. Clause (a) states that the location of a supplier refers to a place of business where the supply will be initiated. ‘Place of business’ is defined as the place where the business is carried on. Warehouse or storage place for goods also fall under the category of ‘place of business’. The immovable property in this case does not qualify as a place of business.

    As per Clause (b), under Section 2 (50) of the CGST Act, fixed establishment is defined as a place that has a suitable structure and sufficient degree of stability in terms of technical resources and human resources. In this case, the immovable property does not have any technical or human resource, making Clause (b) void.

    Clause (c) of Section 2 (15) of the IGST Act, talks about the supply of service from multiple establishments. Clause (c) is also not applicable in this case.

    The only clause left is Clause (d) which states that in the absence of the other clauses, location of the usual residence will be the location of supplier of services. This has been mentioned under Section 2 (15) of the IGST Act.

    Bottom Line:

    Thus, in this example, the land owner’s location will be Mumbai but the place of supply will be Delhi. This will fall under Section 7 of the IGST Act. The owner of the land will not have to take the GST registration in Delhi.

    Important Facts to Know:

    1. According to the Government, the builders will not be allowed charge high tax rates after GST has been imposed.
    2. For people who have home loan for properties under construction, Goods and Services Tax will prove to be a pleasant surprise.
    3. The Government also stated that home prices will go down after GST imposition.
    4. According to the Finance Ministry, the construction of complex, flats and building will have lower incidence of Goods and Services Tax as compared to different state and central indirect taxes incurred by them under the present regime.

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