With the implementation of goods and services tax (GST) from 1 July, the numerous sectors in the Indian market are to be affected. Real estate is one among them. GST has brought all indirect taxes (service tax, excise duty and value added tax which apply to the procurement of goods and services during construction) under one unified tax structure; leading to a scenario where there will only remain the direct taxes (capital gains tax and wealth tax), stamp duty and GST for all property-related transactions.
GST is expected to be a sentiment booster for the industry and will seek to revive buyer and investor interest by bringing more transparency in taxation. As the perception of the sector is said to have improved, the prices are likely to drop around one to three per cent if it all they do, according to a report by Edelweiss Securities.
The Centre has also hiked GST rate for the sector to 18 percent from 12 percent decided upon earlier. And the new rate of 18 percent would now be charged on two-thirds of the under-construction property value, which will turn around to be the same as 12 percent on the entire value of the property that was announced earlier. The only catch is that states also come out with a similar notification.
Overall the impact of GST on real estate would be basically tax neutral but full of gains for the affordable housing sector. Sachin Sandhir, global managing director – emerging business, RICS, says it is expected to keep real estate costs low for the affordable housing segment, but increase costs for others. Considering that almost 70 percent of the real estate market caters to the middle to high income segment, GST could help shift focus, particularly of smaller developers, towards the high volume, low to medium income segment.
In fact, Vinod Menon, director and CEO, Citrus Ventureswho caters to the mid-segment in Bangalore, is enthused by the tax breaks and sops given to developers for affordable housing. He thinks the subsidy provided under Pradhan Mantri Awas Yojana (PMAY), and the Rs 2.5 lakh subsidy given to customers may help save many developers to coast through this difficult time and those stuck with transitionary projects. He is constructing affordable projects under PMAY scheme. Apart from this, he has plans of constructing a villa project under PMAY urban scheme of 110 sq m catering to customers falling in the 12-18 lakh segment. He strongly believes an affordable villa in the main suburb of Bangalore at near about Rs 55 lakh will have a good appetite and fulfil aspirations of this affordable segment.
But home appliances which are a necessity for consumers, with 28 percent GST, the consumer price (market operating price- MOP) could marginally go up by 1-2 percent post implementation of GST. Kamal Nandi, Business Head and EVP, Godrej Appliances says this could have an impact on demand in the short run. However, he thinks normal monsoon, boosting agricultural economy and hike in allowances to government employees will propel demand during the forthcoming festive season.
The taxation earlier was too complicated for buyers. For instance, buyers were earlier liable to pay taxes depending on the construction status of the property and the state where it is located. Buyers also had to pay VAT, service tax, stamp duty and registration charges on purchase of an under-construction property. However, if the purchase was for a completed property, the tax applicable were stamp duty and registration charge. Furthermore, since VAT, stamp duty and registration charges were state levies, each state specified its own figures. Service tax was a central levy and was charged on construction. So the calculation of taxes was very tedious in the earlier regime. GST charges all under-construction properties at 12 per cent of the property value. This excludes stamp duty and registration charges. No indirect tax is applicable on sale of ready-to-move-in properties hence the tax will not apply to those. The biggest takeaway is that GST is a simple tax that applies to the overall purchase price.
If you are a developer, you were earlier charged for Central Excise Duty, VAT and entry taxes collected by the state on construction material costs. Further, you had to pay a 15% tax on services like labour, architect fees, approval charges, legal charges etc. Your tax burden was transferred to the buyer eventually. However, under the new regime, the changes in construction costs are not grave. Furthermore, reduced cost of logistics will result in reducing expenses as well. The input tax credits will also help you increase profit margins and it will be a simpler tax to work with.
Moreover, with regards to GST, there are a couple of aspects that need consideration, points out Sachin Sandhir, global managing director – emerging business, RICS such as:
1) The incorporation of a tax credit system will require all parties within the value chain to be under the GST net. Several sources of material such as river sand etc. are not from organised sources.
2) The composition scheme could be retained as an option, but only to providers of materials; it will need being withdrawn from developers.
3) The tax audit and quality control protocols will also need considerable changes to ensure that advantages of low levies in certain segments and materials are not misused in an inappropriate segment, such as a developer claiming higher credit for a material not used in construction, but which is difficult to detect once the unit has been constructed.
Thus GST alone cannot solve real estate market affliction – both for the buyer or the developer. Broader framework of policies and resources will be just as important to leverage the opportunity posed by GST.