The Goods and Services Tax (GST) on residential projects could cause rents to drop slightly or stagnate, but the market would acclimate to the new tax dynamic, real estate experts predict. Residential rents were placed under the Goods and Services Act from July 18. GST will also be payable by tenants on a government reverse charge basis.
Will GST on rent affect expansion?
The new taxation could have a significant impact on business rents. Vivek Rathi, Research Director at Knight Frank India, said: “The recent decision by the GST Board to impose an 18% GST on residential properties let to GST registrants will have a significant impact on the rental property market in India.The decision may hamper the expansion of rental property in India by increasing the tax burden on companies that rent residential properties to be used as accommodation and guesthouses for their employees. the change harms GST-registered businesses and individuals, it has no effect on individuals whose rental transactions fall below the threshold required to be considered a GST-registered member.”
Which markets are likely to be affected?
With residential rental being an inherent demand, taxation may slow down but will not suppress the market for long. Piyush Bothra, Co-Founder and Chief Financial Officer of Square Yards, said: “The amendment to make residential accommodation subject to 18% GST from July 18 is a bold move and will have an impact on the demand for rental housing. That won’t matter because the biggest tenant market is among the salaried class, who aren’t affected by this change. This would have no impact on total spending by independent professionals and small business owners. However, it is important to note that residential rental is an inherent demand that will not vanish simply through higher taxation. There will certainly be a marginal decline or stagnation in rents and rental yields in major cities could moderate in the coming months as the market acclimatizes to the new tax-induced dynamics.
Who will be most affected, businesses or individuals?
Companies will probably be more affected by the new taxation than individuals. Vivek Jalan, Partner, Tax Connect Advisory, says: “This would have a significant impact on companies that rent guest houses or rent residential houses for the use of their employees or otherwise. According to the experience in such cases, the GST ITC on such rent paid by the businesses may be challenged by the GST Department based on Section 17(5)(g) of the CGST Act 2017 where the ITC of the GST paid for any service for personal consumption is blocked.
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