The Goods and Services Tax (aka GST), a much awaited landmark reform undertaken by the government, is more than likely to give a formidable boost to the Indian economy in general, and real estate sector – one that contributes significantly to our GDP – in particular. Now that both the houses of the Indian Parliament have passed the Bill, this conviction is even more reinforced. The GST dispensation will unify the Indian market into one entity as opposed to the largely fragmented form in which it has existed until now due to differing levels and layers of taxation in the different states of the Indian Union. Here we will take a look at how the new dispensation will be beneficial to the real estate sector …
GST will usher in the era of ‘One Country, One Tax’ by creating a huge common market in the country, by eliminating a plethora of central and state taxes on the movement of goods and services. It will do away with the cascading burden of tax on tax and all central and state level taxes and levies on all goods and services will be subsumed within ONE integrated tax, with components of central and state GST. As a result, the end consumer will gain from lower tax rates that will follow from GST, with tax charged only on value addition and set-offs against taxes on inputs/previous purchases. Large scale leakages will also be prevented thanks to a robust IT structure, reducing hidden costs of doing business and resulting in reducing the overall tax burden on consumers.
Here we will view and review the impact of GST on the real estate sector by digesting the current backdrop in which it exists today – plagued by myriad indirect taxes at both the central and state levels. “At the central level, confusion still prevails on certain aspects of applicability of service tax and availing of CENVAT credit. And on the state level, issues around VAT and stamp duty continue. GST seeks to address key long-standing issues such as overlapping between VAT and service tax valuation, resolving it by deeming construction activity/works contracts to be ‘supply of services’, with no requirement of splitting the contract value, thereby bringing in a uniform tax structure across the country,” says Mahesh Jaising, Partner, BMR Associates. Adds Anuj Puri, Chairman, JLL India, “Apart from a significant reduction in tax management expenses due to the single uniform tax, compliance costs will go down as well “.
According to Aman Agarwal, Director – K V Developers & Member – Governing Council, NAREDCO; the advent of GST will subsume 16 major taxes and levies into a single tax, and stop double-taxation to relieve end-users of inflated prices. Vineet Relia, MD – SARE Homes, believes that home buyers in general could benefit from the introduction of GST provided the rates are moderate. “The works contract to be taxed as a service under the model GST law is expected to provide certainty on taxability of the construction sector. This should lead to reduction in tax costs as the tax would be now charged on the actual contractual base and there would not be any overlap of VAT and service tax on a certain portion of such contracts like under the current regime”. Adds Mahesh Jaising of BMR Associates, “For the residential sector, the free flow of credits should reduce contracting price. But then the impact on the customer will depend on whether the contractor on-passes the benefits to them or not”.
It is worthwhile mentioning that while buying an under-construction flat, the buyer needs to pay both service tax and VAT that varies from state to state. Additional indirect taxes are paid by the developer during procurement which gets built into the cost of apartment. But Kushagr Ansal, Director of Ansal Housing believes that simplified tax structure in the form of GST would remove tax inefficiency, thereby bringing down property prices, resulting in better affordability for people looking for property options in tier 2- 3 cities. Deepak Kapoor, President CREDAI- Western UP too agrees that GST will lead to cost reduction, leading to a spurt in demand. He expects 15-20 percent growth in the real estate sector over the next 5-7 years. Dhiraj Jain, Director of Mahagun Group also thinks that GST would provide relief on the pricing front: “Service Tax and VAT for purchase of homes booked prior to completion, impact pricing. Then there are numerous components of non-creditable tax costs such as CST, entry tax, custom duty etc., which is duly paid by the developer on its procurement side which are basically ingredients for the cost pricing of units”.
The real estate sector will get benefited by way of affordable pricing from uniform tax on building materials including cement, steel etc. “Their costs become a major deciding factor while finalising the price of the finished product – be it home, office or mall,” says Arjun Preet Singh Sahni, ED of Solitarian Group. Concurs Anshul Jain of C&W: “Under GST, developers will see lesser burden of tax on input items like cement, steel etc., as tax credits would be available for set off at various stages, which will in turn lead to low construction costs for developers across all asset classes. And this could likely be passed on to property buyers/occupiers”. Anuj Puri of JLL is of the view that introduction of GST will reduce transit time taken for border crossings and paper work, which will positively impact the pricing of construction materials. Currently, construction materials and services are subject to various taxes which make taxability highly complex. As of today, the provision relating to taxability of construction under VAT regime is state specific and there is a differential tax rate on works contract and materials used for construction.
Commercial real estate will also get a boost with GST. Says Manoj Gaur, President, CREDAI NCR and MD, Gaursons: “Commercial realty players will be hugely benefited as all the lost CENVAT credit which in current regime is a cost to commercial developer, can be availed if GST is applied in a free flow manner that will also help in reducing costs”. Adds Mahesh Jaising, “On the commercial side, the modern traders/malls can now claim credit of GST paid on rentals. However proposed continuation of the denial of construction related credits under GST as well would be a dampner to developers.”
In the commercial real estate segment, warehousing and logistics is going to get a major fillip. Says Anshul Jain, “This sector, which is essential to raise the competitiveness of India’s manufacturing, would be specially benefited by GST as it would bring about increased supply-chain efficiency. With the abolition of various central, state and local level taxes, GST will enable easier transfer of goods between states, giving way to larger centralised and advanced warehouses that would serve as hubs to service various states”.
But then there are some concerns as well. Vineet Relia thinks that for developers, the aspect of valuation is a matter of concern as currently no deduction is provided under GST for the value of land. This can contribute to a higher tax burden considering that there is already an additional tax incidence in the form of stamp duty on the value of land. Anil Pharande, Chairman of Pharande Spaces raises the issue of some confusion regarding GST implementation on residential projects. He says that in the current scenario, there is no service tax applicable to renting immovable property, particularly for residential purposes, but service tax and VAT are implemented on the construction work. The question is whether GST will offer differential tax for residential properties. Mahesh Jaising talks about GST’s adverse impact on the SEZ sector. “The continuation of denial of construction related credits under GST as well would prove detrimental to developers. Also, with GST silent on zero-rating of supplying goods and services to SEZ developers and units, the SEZ scheme may not appear beneficial any more”.
Going forward, as GST takes its final shape over the next few months, these concerns may well be addressed. Notwithstanding this, one cannot but overlook its major advantage of giving a boost to the ‘ease of doing business’ and strengthening the confidence of foreign investors by way of transparency. Along with recently passed RERA and Benami Property Act, GST too will help foreign investors develop faith to invest in regulated realty. GST will disincentivise tax evasion providing no room for hidden transactions, thereby bringing in transparency into the system and boosting positive sentiment. “While the complete effect of this bill will take some time to be realized in some sectors, overall it is expected to have a long lasting and positive, progressive impact on the economy, especially the real estate sector, by enhancing the present business sentiment in the country”, says Anshuman Magazine, Chairman, India and South Asia, CBRE.
So as the government readies itself to implement GST from April 1, 2017, without gainsaying it remains to be seen to what extent GST gets diluted during the interim period in terms of the GST rate. A central government committee has recommended 18 percent tax rate while states are asking for over 20 percent. As a higher GST rate will lead to inflation, one hopes that a reasonable rate is fixed, so that the gains of GST to the real estate sector in particular and to the overall economy of the country in general are not frittered away.