Builders Forecast Affordable Housing Prices Falling by 3-4%

The recent implementation of GST (Goods and Service Tax) is looking to cut down the cost of affordable housing although it depends on the developers also. If they don't enhance accommodation prices to get enough money to repay investment return during this period, the prices can be controlled with the help of practice of GST. After implementation of goods and service tax (GST), now the developers have to cut on the cash component and source their inputs from the registered retailers to apply any tax rebates. There might be some price rupture while purchasing raw material from the registered retailers. 

The buyer of under construction property will have to pay twelve percent GST (good and service tax) besides to stamp duty and any other charges. Corresponding to Ashok Mohanani, NARECO (National Real Estate Development), and Vice President-affordable housing part can see the price drop of about three to four percent. Ashok Mohanani also added that- affordable housing in Delhi, Mumbai or any other cities in India would have benefits of purchasing input tax credit. Earlier, the developers used to pay excise for fittings of steel and cement that would involve in accommodation prices. 

They did not get any source of input credit, but after goods and services tax they will be able to purchase credit that will permit them to cut down accommodation prices, benefiting the buyers as well. Hence as per the experts, the new tax will be helpful to the overall industry and also to the buyers in the affordable housing segment. 

GST (Goods and Services Tax) will rein down many indirect taxes such as VST, excise duty, service tax, etc., that were indirectly paid by buyers to developers. Although, this influence may not be seen in the premium or lavish housing segment and they will less or more remain the same.  A sale of upcoming real estate property in Delhi, Mumbai or any other cities will be classified as the supply of the services, and it will be subjected to goods and service tax payments while the sale of complemented land and real estate properties are excused. Also, the VAT charges and service tax paid on the sale of an under-construction property will come under goods and service tax. 

As per the ICRA report, goods and service tax rate will be twelve percent for buildings constructed for the sale that includes the land value as well as the sales value. If the accommodation and building value happen to be a separate agreement, an expected goods and services rate will be eighteen percent on the construction agreement value. An ITS (Input Tax Credit) for various construction good and services used in the building will be fully available although if the Input Tax Credit exceeds output goods and service tax liability, it will not refund. The influence of goods and service tax differ from state to state due to various tax structures followed in several states. Similarly, savings in project cost may also differ accordingly, depending on the project cost.  

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Developers in India Hope for Property Boost From Goods and Services Tax

Albert Einstein said that the hardest thing to understand in the world is income tax. At present, there are several taxes levied at the state and central level. Such a system has led to rise in the final prices of the goods and services.

The government is all set to roll out the Goods and Service Tax (GST) Act from July 1, 2017. GST is a single tax rate that will replace all the existing indirect taxes by the State and the Central government. A single tax rate is expected to bring uniformity in the tax system.

The realty sector is particularly excited about this; especially, after the slowdown in the sector post demonetisation. The GST on under construction property will be 12%.

Here’s all you need to know about GST and the real estate sector:

The Existing Tax Rates

At present, service tax and Value Added Tax (VAT) is levied on under construction property. For properties costing more than Rs.1 crore, you pay a service tax of 4.5% on the agreement value. For those costing less than Rs.1 crore, the tax rate is 3.75%. Under construction properties also attract VAT. The VAT rate varies across states. Maharashtra levies 1% VAT on the agreement value. The VAT rate in Karnataka is 5.5%. States like Tamil Nadu and West Bengal do not levy VAT. In addition to these taxes, you pay stamp duty as well as the registration charges while buying a property.

• Tax Rate Under GST

The 12% GST will do away with the existing service tax and VAT. However, you will still have to pay the stamp duty and registration charges. On the surface, the new tax rate may be perceived as a higher tax burden for the realty sector. However, the tax incidence in actuality is quite lower. This is because of the Input Tax Credit (ITC) that the traders and manufacturers claim.

• Input Tax Credit (ITC)

Traders and manufacturers pay tax on the raw material that they use for their product or service. They again pay tax on the final output that they offer. ITC allows them to claim a deduction from the tax on the output. The tax paid on the input can be reduced from the tax paid on the output. Currently, real estate builders get no ITC on the tax paid on fittings, steel, and cement. Under GST, this will change. Post, GST, builders will get the benefit of ITC.

Developers Hopes on GST

Real estate was one of the worst hit sectors due to the demonetisation policy. GST is expected to bring some respite to the real estate sector. Since GST allows ITC, the property prices are likely to come down. Several developers are of the opinion that GST will boost investments in sector.

With reduced prices, the Indian real estate market will become more attractive for Non-Resident Indians (NRIs). GST is likely to invite more foreign investments into the realty sector. This is further supported by the findings of property consultant Knight Frank and industry bodies such as the Federation of Indian Chambers of Commerce and Industry (FICCI) and National Real Estate Development Council (NAREDCO). According to 64% of the industry leaders, residential sales are likely to improve in the next 6 months after GST implementation.

Materials such as steel and cement are important inputs for the construction business. These inputs are most likely to be cheaper due to the reduced tax rates under GST. For instance, coal is used in the making of steel. The current tax incidence on coal is 11.69%. Under GST, coal will be taxed at 5%. Thus, GST is likely to bring down the cost of raw materials. This could contribute to the reduction in the final property prices.

Property developers in India are also hopeful of a transparent realty sector. Many believe that a single tax rate is likely to bring more clarity to the sector.    

To sum it up

GST is said to be India’s biggest tax reform. Developers across the country are hopeful that this reform will boost investments into the realty sector.    

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How GST will Impact 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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