The real estate sector, after agriculture, is the second-largest employment provider in India. It not only contributes significantly to job creation but also generates substantial revenue for the government. Rapid urbanization and the expansion of the corporate sector have created immense demand for residential and commercial properties. As property values rise, the real estate sector has become a major source of income, leading to annual changes in the taxes imposed on it in the country’s budget.
So, how is the taxation system in India’s construction sector? What challenges does the real estate sector face in terms of taxation? And, when compared to other countries, are taxes in India higher or lower?
Flats: 7%
Plots: 9%
In comparison to stock markets and gold, real estate investments are becoming increasingly popular in India, with many people opting to invest in land due to its higher returns. The construction sector has become a major contributor to both employment and government revenue, particularly with rising demand for homes, offices, warehouses, co-working spaces, data centers, and student housing, driven by globalization and increased job opportunities. As a result, both central and state governments view taxes in the real estate sector as a significant source of income.
State governments and urban local bodies impose property tax, stamp duty, registration charges, and vacant land taxes, while the central government levies Minimum Alternate Tax (MAT), corporate taxes, GST, and income taxes. Specifically, when investing in property, stamp duty ranges from 5% to 15%, and registration charges vary by state. Corporate taxes fall between 25% and 30%, while GST on construction materials is between 5% and 12%. Services are taxed at 1%, and affordable housing projects attract a 5% GST. Income tax is applied to rental income, and GST on rentals is set at 18%. When selling property, capital gains tax ranges from 10% to 20%, and MAT is charged between 10% and 15%. In Telangana, stamp duty is 7% for flats and 9% for plots.
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In the last decade, the percentage of taxes levied on the construction sector has significantly increased, according to industry sources. To boost revenue, stamp duties and registration charges have been raised substantially. Moreover, after the implementation of GST, the process of paying taxes has become more complicated. When compared to developed countries, taxes on properties in India are relatively lower, but taxpayers often complain about the double taxation they face—once by the central government and again by state governments—leading to a negative impact on returns.
After the implementation of GST, transactions in real estate have become complicated. Even for properties that are under construction or not yet built, the imposition of registration and stamp duty, along with GST levied during the transfer of TDR bonds from landowners to developers, has created challenges. Developers cannot claim GST input tax credits on the construction costs of commercial properties like shops and hotels. Additionally, when landowners transfer development rights to developers, the developers come under the scope of service tax. The imposition of service tax on land, which is a real estate asset, is causing confusion among developers.
The mixed tax system is causing real estate investment trusts (REITs) to face numerous challenges. Commercial real estate investments in shopping malls, office spaces, hotels, apartments, resorts, and warehouses generate income through REITs. However, when income tax applies, developers have to pay taxes on capital gains. Taxes on returns from short-term and long-term capital gains reduce the tax benefits that investors would otherwise receive. In India, tax exemptions are available only on select properties, such as slum redevelopment and affordable housing. All other types of properties are subject to various taxes, and developers must pay them all.
When compared to India, which ranks 5th among powerful countries, the taxes in the real estate sector of other nations are relatively higher. For instance, in the USA, there is no stamp duty, while in Australia, it stands at 6.50%, and in the United Kingdom, it ranges from 5% to 12%. China imposes a 3% deed tax and a 0.5% to 1% stamp duty on sales. Regarding GST and VAT on properties, the USA does not apply any, while Australia imposes 10%, the UK 20%, and China 5% to 9%. In terms of capital gains tax, the USA charges 21%, Australia ranges from 12.5% to 30%, the UK is between 18% and 28%, and China applies a land value appreciation tax of 30% to 60%.
Corporate taxes are also significant, with the USA charging between 21% and 37%, Australia at 30%, the UK from 19% to 25%, and China at 25%. Rental income tax is high too, with the USA charging 30%, Australia ranging from 15% to 30%, the UK 25%, and China imposing a maximum of 3%. To improve the tax system, measures such as streamlining income tax and GST codes, implementing Geographic Information System (GIS) technology to enhance property assessments, and encouraging affordable housing construction should be developed. Regular reviews of the impact of these measures will help resolve difficulties and bring about gradual improvements.
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