TAX TALK – `Those who had postponed their property purchase decision will buy now…’

The GST system takes off tomorrow. Prospective homebuyers are expected to make a move now with the uncertainty cleared. Property investors too will benefit with the threshold limit for applicability of GST on rentals being raised to Rs 20 lakhs from Rs 10 lakhs. Anil Rego, an investment consultant, explains what GST entails for consumers and homebuyers.

What does GST mean for consumers?

The Goods and Services Tax (GST) is one the most significant tax reforms for India.The GST Council has finalised the fitment of over 1,200 goods and 500 services in the four-tier tax bracket of five, 12, 18, and 28 percent under the GST regime. The GST will subsume 16 different taxes, including excise, VAT, service tax and entertainment tax.

While there could be some glitches during implementation, agility on the part of businesses and governments will hopefully smoothen the implementation of making the country a truly one-market. This means the economy stands to gain over the long term as efficiency gains and higher government revenues translate into higher growth potential.

Because GST will usher in a much more simplified tax structure in the country, and bring in cost efficiencies, consumers will be reap the re wards. The indirect tax cost on most goods is currently on the higher side due to numerous cascading of taxes. A combined effect of these taxes leads to an effective indirect tax rate of 25-30 percent sometimes in the hands of the customer.

As the standard rate of GST is 18 percent, most goods will benefit from this significant reduction. In the new regime, as much as 81 percent of household items fall below or in the 18 percent GST slab. In services, there are some that attract a higher tax such as insurance, mutual funds and banking transactions. There are some that have a lower tax rate now. Tax on entertainment, cable and DTH services will come down under the GST regime as the ‘entertainment tax’ levied by States has been subsumed in the GST.

Where will GST reflect and how will it be different from sales tax and VAT?

From tomorrow, every seller registered under GST will have to issue a GST compliant invoice. This means, for a customer, in the bill, service tax and VAT will be replaced by the words GST.

For example, let’s assume that a DTH subscriber with a monthly rental and usage pays Rs 515 per month, service tax of Rs 77.25 (at 15 percent rate) and another Rs 103 (20 percent entertainment tax). So, the total bill is Rs 695. Now, under the GST regime, DTH attracts a tax rate of 18 percent only. This means the person will now pay Rs 92.70 as total tax against the Rs 180.25 previously. Now, the bill, if all other things remain constant, will become Rs 607.70, translating to a saving every month. The GST Council has finalised 18 percent tax on DTH services.These services attracted an entertainment tax in States in the range of 10-30 percent over and above the service tax levy of 15 percent.

What is input credit? Who can claim it?

Input credit means that at the time of paying tax on output, you can reduce the tax already paid on inputs. Input credit mechanism is available to those who are covered under the GST Act. This means manufacturers, suppliers, agents, and any of those registered under GST can claim input credit.

Consumers cannot claim input credit, but will benefit if the manufacturers pass on the input credit benefit in the product or service pricing.

Let’s understand input credit with an example. If a manufacturer has a tax payable on the final product (output) of Rs 500 and tax paid on purchases (input) of Rs 300, the manufacturer can claim input credit of Rs 300.This means they need to deposit only Rs 200 in tax.

To claim input credit under GST, a manufacturer must have a tax invoice (of purchase) or a debit note, must have received the goodsservices, tax charged on purchases should have been paid to the government, and the supplier should have filed GST returns.

What changes for pro ospective homebuyers?

Under the GST regime, all under-construction properties will be charged at 12 percent.This excludes any stamp duty and registration charges. The 12 percent rate will not apply to completed and ready-tomove-in projects. Previously, value added tax (VAT) and service tax were charged separately and of different rates.With more seamless input credits, the taxes are likely to be marginally lower under GST.

The impact on property prices under GST will be driven by cost structure land and development costs and to some extent the input credit available under GST passed on to the homebuyer. Homebuyers are expected to adapt quickly to the GST system.People who postponed their property purchases due to uncertainty on benefits of GST will buy the property now.

Does the shift to the GST system affect landlords with rental income?

Rental income is subject to GST and hence rentals are likely to go up. Today, as long as your rental income from all the properties owned by you in India doesn’t exceed Rs 10 lakhs, you are outside the purview of the service tax net.Under GST, the threshold limit for applicability of GST has been raised from Rs 10 lakhs to Rs 20 lakhs and this will provide respite for smaller properties.

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