The Lower House of Parliament has cleared four Bills — Integrated GST, Central GST, Union Territory GST and Compensation Bill — in preparation of the upcoming rollout of the goods and services tax (GST) regime This sets the stage for states to enact laws and implement the new tax regime from July. The tax rates applicable on products and services are expected to be announced by April-end.

As widely reported, the CGST Bill states that any tenancy, lease, licence to occupy land, or easement will be considered as supply of service. Any lease or letting out of a residential, industrial or commercial building for commercial purposes will also constitute a supply of services. Simultaneously, the sale of land or building (except the sale of under-construction buildings) will not be treated as either supply of goods or services. The sale of land and buildings will be out of the purview of GST, and such transactions will continue to attract stamp duty.

Therefore, once goods and services tax comes into effect from July, the leasing of land and buildings — as well as home loan equated-monthly instalments paid by those who purchase under-construction apartments — will attract the applicable tax rate. Depending upon the tax rate that will be announced for real estate, the effect could be higher or lower than today.

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Under the service tax regime, developers and homebuyers can obtain benefits under the abatement scheme. In the case of buying an under-construction flat, an abatement of 75 per cent is allowed, subject to the flat being less than 2,000 sq ft and sold for less than Rs 1 crore, taking the effective tax rate from 15 per cent to 3.75 per cent. If the two conditions are not met, the abatement is reduced to 70 per cent and the effective tax rate to be borne by the buyer increases to 4.5 per cent. States also charge VAT on top of this service tax.

However, if the abatement rules do not apply under the GST regime, the applicable tax rate would shoot up dramatically.