In a big relief to home owners and individual investors relying on rental income, such earnings will not be taxed under the Goods and Services Tax (GST).
"Services by way of renting of residential dwelling for use as residence" have been exempted from taxation web as per the decision taken during the 14th GST Council meeting at Srinagar on May 19. Residential construction services, will invite GST at the rate of 12 per cent, which will apply to developers selling residential units before completion of construction to the home buyers. When one computes the effective tax costs today built into the prices (both visible and invisible taxes), the overall tax impact could be lower than what it is today. Hence, if the developers pass on the credits completely and bring down the base prices, then, home buyers may marginally benefit under the GST regime.
According to industry experts, bringing leasing of land under the GST ambit comes as a surprise to many as it was not supposed to be a part of it earlier. However, its effects would be offset by tax credits that people would get in return for paying GST. At present, a 15 per cent service tax is levied on sub-leasing of commercial property, while renting or sub-leasing residential properties is generally exempt from service tax. Under the GST, a tax rate upto 18 percent of the transaction value has been proposed.
Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes where room tariff of Rs 2500/ and above but less than Rs 5000/- per room per day will be taxed at 18 per cent with full input tax credit.
Currently, service tax is levied on rental income from commercial property, but not levied on residential property.
The GST Bill has also clearly defined that the tax will not be levied on sale and purchase of immovable property like land, house and other real estate assets, which are not under construction.
“Credit/set-off of input GST is available to a developer, if the sale is executed prior to obtaining the completion certificate or prior to first occupancy. However, this credit is not allowed if the developer chooses to rent out the property. Hence, we might see a spike in commercial rentals,” explains Amit Sarkar, partner and head – indirect taxes, BDO India.
House rents may go up from July 1, with the government treating renting of an immovable property as a service that will attract the Goods and Service Tax (GST). Consequently, tenants may witness a hike in rent payment under the GST system, as there is no service tax applicable on residential properties, in the existing system.
"The government is trying its best to make GST litigation free. The bills very clearly specify that GST would be charged on any lease of land or letting out of the building or construction of a complex, building, civil structure or a part thereof, where whole or any part of consideration has been received before issuance of completion certificate or its first occupation," Nangia & Co Director Rajat Mohan said. Granting someone license to occupy a property will also attract GST.
Citing the impact on home loans, experts point out that GST is applicable on financial services, at 18 per cent. Hence, loan processing charges are likely to increase in the GST regime. Similar to the current regime, such GST charged always remains a cost in the hands of the buyer.
Not just real estate but transport and warehousing sectors would also be affected if the government goes ahead with its plan to levy the goods and services tax (GST) on leasing of land, renting of commercial space as well as EMIs paid for the purchase of under-construction houses.
Experts said the GST subsumes central levies like excise and service tax and local levies like VAT, entertainment tax, luxury tax. However, it does not subsume Electricity Duty.
Since the GST Constitution Amendment Act does not provide for subsuming 'electricity duty' under GST, it will continue to be levied by the respective state governments.
Certain states like Delhi exempt residential properties from electricity duty but levy it on commercial and industrial units.