Real Estate and GST: A Game Changing Combination?

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The Indian realty industry is going through an unprecedented period. With sluggish growth, a dip in investments, unsold inventories, and thanks to the pertinent accusations of unaccountability, the industry is in a bad slump.

However, things seem to have taken a turn for the better and it seems the year will end with promising signs of revival.

First, India has an advantage with its demographic dividend; its youth. What they are looking for is affordable houses for sale. According to a recent report published by the real estate consultancy Cushman & Wakefield, the launches of affordable housing saw an improvement of 30% compared to 25% in the same period in 2015-16.

Segment

Apr’16-March’17

Apr’15-Mar’16

% change

Affordable

32,300

29,325

10%

Mid

64,250

72,800

-12%

High-end

10,700

14,600

-27%

Luxury

950

925

3%

Total

108,200

117,650

-8%

Two, the Real Estate Regulation and Development Act or RERA. The Government of India brought this act into effect on May 1, 2017. The act aims to protect homebuyer’s interest, restore people’s confidence in the real estate sector, and most important; ensure ‘housing for all by 2022’. One mandate of this act is that all developers should sell their residences on the basis of the carpet area—the real usable space in a home. With this, one can expect to pay the real price for a home, be it flats in Worli or another location in India.

Three, this is perhaps the most important disruptor to the real estate sector and that was the implementation of the Goods and Services Act or GST as it is popularly called. Implemented on July 1, 2017, the Act touted as a game changer has created quite the buzz and ripples in the realty industry. From upcoming luxury property in South Mumbai or affordable residential projects in Kochi, the act has literally disrupted the nation.

The GST was created to subsume all indirect taxes in India and streamline the taxation structure. The taxes replaced include:

  • Indirect Taxes Replaced By GST

  • Sales Tax

  • Central Excise Duty

  • Entertainment Tax

  • Service Tax

  • Octroi

  • Purchase Tax

Finance Minister Arun Jaitley spoke to the press recently and said that the topic of bringing the real estate under the ambit of GST will be discussed at the November 9 meeting of the GST Council in Guwahati.

Bringing the industry under the GST ambit has its many benefits.

Benefit 1

The tax will ease the taxation structure as it subsumes indirect taxes. This will save cost and time for the developer and the customer.

Benefit 2

GST offers the benefit of Input Tax Credit. It only taxes value addition as each stage of the cycle. For buyers, they pay tax once to the final supplier for the home they buy.

Benefit 3

Developers have to direct the benefits of Input Tax Credit to home buyers.

However, there are few who wait for the outcome of the GST council meeting on November 9, 2017.

Anuj Puri, Chairman, Anarock Property Consultants told the Hindu Business Line that, “Currently, the GST rate on under-construction real estate projects stands at 18 per cent. If this rate is also applied to the cost of land and on the sale of ready-to-move homes, it will seriously impact buyer sentiment,”. He added that if the council lowers the rate and subsumes the cost of stamp duty and property registration, a marginal mitigation of the adverse impact is possible.

The Hindu Business Line asked MS Mani, Partner GST Deloitte, he said that “It is good that the government is thinking ahead and the debate on inclusion of the entire real estate sector has already begun. However, the legislative processes required to make it a reality will take time and the consensus-building process with States should begin soon,”. This is because even the states are divided over the inclusion of the realty industry under GST.

Santosh Dalvi, partner (indirect tax) at KPMG India echoed a similar statement when he told Bloomberg Quint, “If entire real estate is brought under GST, they would have to abolish the stamp duty and we don’t know how the government plans to compensate the states for their loss.”

With GST’s impact on allied industries, it has impacted property rates in Mumbai and other major cities. While homebuyers have cheered this, developers are apprehensive of the impact once the industry comes under the act. With stamp duty and registration charges being constant, a high tax rate can shoot prices for the new projects in Mumbai and other cities to highs which will render them unsalable for everybody.

As the meeting deadline looms, the question of including real estate under GST looms large and has divided many people. Only time can tell if the intended aim of GST will bear fruit.