Wednesday, 28 June 2017

How GST will Impact Real Estate Sector in India

Impact of GST on Real Estate Sector in India

The real estate sector in India is one of the most important revenue generating sector in the country. Real estate in India contributes around 6% to the GDP and generates demand in more than 250 odd ancillary industries. Over the past few years, the real estate in India has witnessed a phenomenal growth not only in the metropolitan cities but also in Tier II and Tier III cities. However, the main complaint against the real estate industry is the lack of transparency that plagues end users and makes the industry a complex one to understand.

The recent introduction of RERA (Real Estate Regulation and Development Act) effective 1 May 2017 has helped to bring transparency in the land dealings and protects the interest of the homebuyer. It is expected that the introduction of Goods and Services Tax (GST) too will bring in greater tax compliance and enhance greater transparency in real estate India. Though prima facie, the cost impact of GST is expected to be negligible, GST levied on real estate will certainly ease concerns over tax structure for those who wish to buy property.

A Unified Tax Regime

Currently, there are two major taxes levied on the real estate sector. These are service tax and value added tax (VAT). However, given the multiple options exercised by developers under the aegis of tax authorities in different states, there are constant disputes over multiple discharges of taxes that even differ from location to location within the same state.

Those purchasing residential property in India have to bear the highest tax burden as they are compelled to pay various elements of non-creditable tax costs, such as customs duty, excise duty, entry tax, Central Sales Tax (CST) which is included in the pricing of the unit. This is apart from VAT and service tax that they must pay on the purchase of a residential property in India. All these taxes add up to 20-25% of the actual price of the unit. This is same even if you buy a property online or otherwise.

Reduction in procurement costs

With the implementation of GST, these taxes will be replaced by a unified tax regime and also ensure a smooth flow of input credit, which in turn will reduce the procurement cost for the developer. Unlike the previous tax regime, builders will now be able to claim input tax against the procurement of key raw materials such as cement and steel. Further, GST will play an important role in simplifying the current tax structure by identifying work contracts as services.

Under the new GST regime, steel products will be taxed at 18% (as against 17.5% currently), cement 28% (as against 23-24% currently) and work contracts will be charged at a rate of 12% (as against the multiple tax structure on work contracts where the Centre levied a 6% service tax, after a 60% abatement and states imposed VAT that could range between 1-4.5%). While the new tax regime looks higher for the construction segment, real estate experts opine that the overall tax incidence will come down significantly as a result of input credits now being available for developers in both residential and commercial segments. 

Under the new GST regime, steel products will be taxed at 18% (as against 17.5% currently), cement 28% (as against 23-24% currently) and work contracts will be charged at a rate of 12% (as against the multiple tax structure on work contracts where the Centre levied a 6% service tax, after a 60% abatement and states imposed VAT that could range between 1-4.5%). While the new tax regime looks higher for the construction segment, real estate experts opine that the overall tax incidence will come down significantly as a result of input credits now being available for developers in both residential and commercial segments.

Neutral impact from cost perspective

Under the new GST regime, a uniform tax of 12% (exclusive of stamp duty) will be applicable on the purchase of residential property in India. However, this does not automatically mean that it will lower the cost of property for those who wish to buy, as real estate pricing is more a result of market forces than principals of cost. Further, the stamp duty is outside the purview of indirect tax regime and will thus continue to be levied as before.

The same principle holds true for the commercial real estate segment. Under the new GST regime, credits related to construction will now be available for commercial property developers. This is expected to bring down project costs for developers thus reducing rentals as well. However, if all commercial real estate business entities including trading companies are not allowed to take credit on the GST paid on rentals (similar to the current regime where service tax on rentals is considered as credit) it will have a contrarian impact as project cost may even get escalated.

Overall Positive Impact

While prospective homeowners and the real estate sector as a whole may not see prices cooling off in the short term, the successful implementation of GST augurs well and will prove to be quite a game changer for the real estate sector. The clarity of a unified tax regime and establishment of a common market will help break the perception against the opaque structure of the real estate market and bring about efficiencies in the sale of the online property.

The existing grey areas of taxation will be eliminated as paper invoicing becomes passé and will bring about greater transparency in tax compliance. This will bring in the much-required accountability for real estate developers as there is a large part of project expenditure that remains unrecorded due to the invoicing clout. A greater transparency in the sector will thus help prospective home buyers make an informed choice. The developers too will benefit from the smooth inflow of input credit and reduced procurement costs.

Finally, the implementation of GST will improve supply chain efficiency and create a lucid audit trail and result in better monitoring of the sector. All of these, benefits will uplift the real estate sector as a whole and will attract more Foreign Direct Investment (FDI) in the sector. The key, however, lies in the successful implementation of GST that will improve sectoral efficiencies and result in better reformation. 

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