The silver lining is sales have been more than new launches, which suggests better days ahead, says Anuj Puri, ANAROCK Property Consultants. A stable
GST could bring in transparency in the real estate sector
NEW DELHI: GST could bring in transparency in thesector, possibly reduce cost of home ownership, especially if GST rate is lower than current rates put together. It could also lead to lower compliance costs and input costs for builders. Getamber Anand, national president of body CREDAI says it could reduce harassment that is there due to multiple taxes today. But builders and consultants are concerned about a clause in the GST bill which says input tax credit shall not be available in respect of the “goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery.”
“This would mean multiple taxation on buyers as builder will pass on non-creditable tax to home buyers even as they pay GST on the consideration charged to them and then stamp duty for registration,” says Abhishek Jain, tax partner at EY India. According to back of the envelope calculations, homebuyers will end up paying around 20-22% in total tax compared to 14-16% if builder gets tax credit.
Here is what the industry has to say about the impact of GST on real estate:
Neeraj Bansal, Partner and Head, Real Estate and Construction sector, KPMG in India
The constitutional amendment bill paving way for introduction of Goods and Services Tax bill and rules in the parliament is a welcome step. The next step involve ratification of this amendment by majority states, post which GST bill will have to be cleared by both Central and State Governments. At an overall level the impact on the sector will hinge upon the effective GST tax rate post abatement allowed for the Land Value in property transactions.
Further, Real Estate industry has to deal with multiple tax authorities such as and VAT and passage of GST Bill may lead to reduction in compliance bring in efficiency whereby the credit input for excise duty etc levied on materials like cement, steel etc. Also the impact of offset of GST credit on construction of building with GST paid on Rents or leases will have to be considered.
From consumer perspective, it is premature to say if GST will bring down property prices. We will have to wait for finer details especially with respect to applicable rate for real estate sector.
Lastly, the Government must consider providing a breather time to the sector to understand and prepare for GST. Global experiences suggest that there is a gap of about 1 year between introduction and implementation of GST, with recent example being Malaysia. Industry however needs to start preparing themselves for GST and organizations must undertake a detailed review of the IT systems, contracts with vendor, suppliers etc.
Abhishek Jain, Tax Partner, EY India
India is on the brink of GST and this is considered as a sign of freedom from multiple taxes currently levied on the real estate sector and the end of myriad litigation owing to ambiguity in the legal provisions. However, eligibility of credits and concessions still remain a cause of worry for the real estate sector. The Model GST Law restricts credit on goods and services acquired for construction of immoveable property (other than plant and machinery). This clause is interpretative which may lead to litigation and result in denial of credits in certain situations
Anshuman Magazine, Chairman, CBRE – India and South East Asia
This bill has been long awaited by the industry. This is a major tax reform for our economy, which will transform India into a single market. Once implemented, it is likely to have a positive impact on the real estate sector, which has linkages with over 250 ancillary industries. Unified taxation will also infuse the much needed transparency into our taxation system. While the complete effects of this bill will take some time to be realized in some sectors, overall, it is expected to have a long lasting and progressive impact on the economy, enhancing the prevalent business sentiment in the country.
Anshul Jain, Managing Director, India, Cushman & Wakefield
The clearance of the Goods and services tax (GST) Bill in the Rajya Sabha is a laudable step that would remove cascading taxes and make India’s manufacturing sector more competitive. Being a destination-based, indirect tax aimed at bringing in more efficiency and rational taxes, GST could actually help to lower manufacturing / processing, logistics and distribution costs, which could further revitalize the manufacturing and associated sectors (warehousing and logistics) by making them more price competitive and boost the overall Indian economy. This would definitely boost the PM’s ‘Make in India’ initiative and create more employment. The warehousing and logistics sector, which is essential to raise the competitiveness of India’s manufacturing sector, would be especially benefitted by the GST as it would bring about increased supply chain efficiencies. GST will ensure the abolition of various central, state and local taxes, enabling easier transfer of goods between states, which would give way to larger, centralized and advanced warehouses that would serve as hubs to service various states.
Further the bill would benefit the overall real estate sector by ensuring a uniform tax structure, thereby improving the tax compliance by the developers. The GST Bill would replace most indirect taxes that currently exist, with one tax, thereby ensuring an efficient taxation system. Under GST, developers would see lesser burden of tax on input items like cement, steel, etc., as tax credits would be available for set off at various stages. This can lead to lower construction costs for developers across all asset classes, which could likely be passed on to property buyers / occupiers.
However, the magnitude of impact of GST on the sector would hinge upon the final rate of GST decided by the government and more importantly on the actual implementation. The time frame for rolling out the GST will stay take some time and the initial period, maybe up to a year, will mainly be needed to take care of any problems that arise in implementation. Hence, actual benefits for final consumers / buyers and the overall positive impact on the economy may take longer to get manifested.
Rajeev Talwar, CEO, DLF
With the various local taxes and the central sales tax getting subsumed in one tax, the multiplicity of taxes goes away and makes it easier to deal with authorities, which has been a big issue so far. Various levies will then get rationalised which would result in more transparent taxation. This would also mean rationalisation of property prices in favour of the consumer.
Niranjan Hiranandani, Founder & MD, Hiranandani Group
This is a major reform undertaken by the Modi government and it will be impacting the economy positively. If managed well, this alone has potential to add at least 1% to India’s GDP growth. Capping the rate of tax is good. However, if the rate is increased later then it will prove to be tricky . Duality of tax authorities at state and central level is not a happy situation. If the states continue to levy stamp duty, other local taxes like labor cess and municipal taxes then it will add burden to home-buyers’ cost.
Ankur Dhawan, Chief Buisness Officer,
With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost for them and can be passed as reduction to buyers. For commercial property, GST will reduce taxation as developers will be able to get input credit of GST paid for construction services against the GST charged on lease rentals. In the long run if GST can help increase GDP by 2% as predicted by experts it will in turn drive the demand for real estate hence helping real estate industry.
On the flip side GST will increase the overall cost of under construction property for buyers if the rate is higher than current applicable Service Tax rate of 15 per cent. For states where VAT is not applicable till now, state GST will be charged. If the rate is relatively lower than 15 per cent, GST can result in price neutral or lower price for consumer.
Brotin Banerjee, MD & CEO, Tata Housing
The Goods and Services Tax is likely to be a game changer for the real estate industry, which is currently facing issues of multiple taxation amounting to over 25 percent in indirect taxes. With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost and can be passed as reduction to buyers.
It will benefit real estate sector by ensuring a uniform tax structure and improve tax compliance by developers. It looks at bringing in greater transparency for the sector and may minimize unscrupulous transactions. GST will have a cascading effect for the homebuyers, as developers with more margins in their hands will be able to restructure the cost of the products in favour of consumers.
Parveen Jain, President, NAREDCO
The enactment of this law will single-handedly solve many of the challenges faced by the real estate sector and help in pulling the sluggish sector out of its long slumber. Heavy taxes that are being paid currently by the developers will automatically go down by a considerable percentage. Construction costs would be reduced to some extent and this benefit could be passed on to the customers, thereby triggering transactions in home buying. There would also be a positive impact on the commercial property segment, as commercial real estate which is already starving from funds could see some kind of a revival.
Rahul Purohit, Principal Partner, Squareyards
GST is a long awaited tax reform which is expected to improve India’s GDP by at least 2%. It aims to consolidate various state and central taxes into a single tax thus making it one of the biggest tax reforms in modern India. Its impact on real estate would be felt mostly on new constructions. This is because, it will seek to merge various taxes on building materials into one thus benefitting builders who would most likely pass it on to the buyers. However, it remains to be seen, what would be the rate of this single tax to gauge its real impact on new launches. With improved economic environment and ease of doing business we are hopeful of a positive impact on real industry.
Anuj Puri – Chairman & Country Head, JLL India
In terms of cost reduction for manufacturers, the current tax structure has three layers at the central, state and city-levels, manufacturing units have to shell out a good amount of money to transport their goods. They end up paying multiple taxes on the transportation. Once GST is rolled out, there will be a common tax structure and thus, the burden of paying multiple taxes will go away. Such units will not have a varied tax structure for transportation of their goods to different locations and will not have to pay each time they transport goods, thus, reducing the overall cost. Likewise, there will be a cost reduction for logistics players, as logistics players create a stock transfer between inventory stocking points within states to avoid a multi-tax scenario. They have a large number of smaller warehouses at various locations amounting to more than 50 small warehouses in some cases, which increases the overall cost of logistics. Also, management of such small warehouses increases the cost and reduces the overall efficiency of the logistics players.
With the implementation of GST, the tax burden will reduce and thus need to have such a fragmented warehouse system will decrease.
The real estate sector also shares positive symbiotic relationships with more than 250 sectors such as cement, steel, IT, BFSI, etc. Due to this, the benefits or drawbacks of GST on each sector will also have an indirect impact on real estate and vice versa. At this point in time, we may see very limited tangible benefits on the real estate industry but the cascading effects will definitely be higher.
Vineet Relia, Managing Director, SARE Homes
The implementation of GST is likely to improve transparency and reduce tax evasion on account of better enforcement and compliance. The home buyer in general could benefit from the introduction of GST if the rates are moderate. The fact that works contract would be taxed as a service under the model GST law is a welcome move and 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. However, for the developer, the aspect of valuation is a matter of concern as currently no deduction is provided under GST for value of land. This can contribute to higher tax burden considering that there is already an additional tax incidence in the form of Stamp duty on value of land.
Neha Hiranandani, Director, House of Hiranandani
The passage of Goods and Services Tax (GST) Bill is the biggest indirect taxation reform in the country. It would be a harbinger of change for the real estate sector which is currently plagued with a myriad of indirect tax issues both at the centre and state level. We hope that the bill brings in a more comprehensive and uniform tax structure that will ensure greater transparency in the sector. The GST will enable a smooth and seamless distribution network in India which will lead to in-time delivery of building material across India.
One of the positives that might come from the bill is removal of restrictions on credit utilization that will strengthen the credit chain in the system. However, since GST will be applicable on the materials purchased by the developer to construct the project, it will have a direct impact on the total costing of the project. The bill treats construction activities as “work contracts” but is silent about guidelines on valuation of land and has kept the sector away from input tax credit. This could mean higher costs for the end consumer. Also, implementation of the bill will not subsume the stamp duty levied by the states, who may increase it from time to time to meet revenue targets thereby pushing costs higher for the buyer.
It will be important to see what the final rate of GST would be because if the rate is higher than the existing cumulative taxes, it will certainly be dampener as it will increase the final cost for buying an under construction flat and defeat the purpose of the bill. While the intentions are noble and correct we feel for the bill to be successful all states must implement it together and at the same rate, else it will be cumbersome and bring additional compliance on an already strained sector.
Ashok Gupta, CMD, Ajnara India Ltd.
With the dawn of concepts like hustling in service tax coupled with reductions and various mandatory charges collected by developers these days, highlights the importance of having a same tax base which can be only answered by GST. A single tax rate across the country will promote fair practices which will further encourage transparency and less evasion in the sector that supports in future growth of demand for real estate.
Kushagr Ansal, Director, Ansal Housing
Now days, there are developers and builders who are constructing projects in different states, specially tier 2 cities and thus have to abide by the state specific VAT laws, service tax and corresponding compliances. The presence of several indirect tax components faced by the developers at present are a major cause that bring tax inefficiency in this sector. A simplified tax structure would also mean that property prices would come down considerably enabling better affordability for people looking for property options in tier 2 and 3 cities.
Deepak Kapoor, President CREDAI-Western U.P. & Director, Gulshan Homz
Implementation of GST will basically work on three major elements for this sector; simplification of tax structure, reduction in construction costs and better transparency. Speaking about its contribution post acceptance, we are predicting a nationwide realty sector growth by almost 15-20 percent than projected in the course of next 5-7 years. There will be a quick reaction towards the sector by its customers as demand is bound to increase due to reducing costs and improving transparency in the sector that has been the hurdle making this sector suffer for long now.
Dhiraj Jain, Director, Mahagun Group
Currently, the homebuyers of this sector are under the pressure of two forms of taxes; service tax and VAT on the purchase of residential units when booked prior to its completion. There are numerous components of non-creditable tax costs such as CST, entry tax, customs duty, excise duty, etc. which is duly paid by the developer on its procurement side which are basically ingredients for the cost pricing of the units.
Vikas Bhasin, MD, Saya Group
There is no doubt that multiplication of taxes will be curbed through GST, but the only question will be what rate gets decided. The only dampener for this sector can be high GST rates, such as 27 percent GST that has been making the rounds as this will counterpoise any possible gains on incremental credits. Also, stamp duty is not proposed to be incorporated under GST and will thus continue to remain as it is at present. Therefore, decreased cost of construction will take place once a lower bracket of GST is applied as the developers will be liable to pay much less than today, thereby allowing cost of units to fall which will directly benefit the end users.
Manoj Gaur, President CREDAI-NCR & MD, Gaursons India Ltd.
A well-defined GST implemented for the country will bring about a relief for this sector and its customers. Commercial realty players will be hugely benefited as all the lost Cenvat credit, which is in current regime a cost to commercial developer can be availed if GST is applied in a free flow manner that will also help in reducing costs. A much simplified single tax rate, reduced construction costs and better transparency in the sector will be much welcomed by the developers and its customers.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
After a long wait, we have finally taken the next big step towards the roll out of GST in the country. Among the various economic policies of the Narendra Modi led government, this will be the most important milestone.
At the macro level, the GST will create further efficiencies in the economy and will add to the ease of doing business in India. The simplification of taxes will widen the tax base which in turn will lead to higher tax collections. In its own way, it will also increase transparency levels within the economy. All these factors will help in transforming India into a favoured investment destination.
For the real estate sector, the GST will streamline the domestic supply chain that will lead to a consolidated and efficient warehousing infrastructure in the country. This will give the much needed push to the retail and industrial sectors to grow.
The positive sentiments after the passage of the GST bill will receive a further boost if RBI does its bit in reducing policy rates on the back of a good monsoon and controlled retail inflation in the economy.
Rohit Gera, MD, Gera Developments and VP, CREDAI – Pune Metro
The passing of the GST related amendments is an extremely welcome step. This will help in terms of ease of doing business in the country. We hope that the final bill takes care of the home buyers and does not raise the cost of homes by raising the tax incidence on homes. Stamp duty will continue and there is already double taxation on this. The first time stamp duty is paid on land, then the flat buyers pay Stamp duty on the flat without any credit for the land payment.
Without addressing the needs of home buyers the government’s desire of housing for all will not be met.
Amit Modi, Director, ABA Corp and Vice President CREDAI Western UP
At present, a real estate developer incurs various kinds of expenses during the construction phase of a project and different kinds of taxes are involved with these expenses, such as VAT/CST, customs duties, service tax, excise duty and so on. Hence, GST may replace these multiple taxes with a single tax, thus reducing costs for all players. Since completed homes will not be impacted by GST as a buyer already pays stamp duty to the government on the transaction so selling an under construction apartment and renting of properties are likely to come under the ambit of this tax. As GST is also going to be applicable on the materials that a builder would buy for the construction of a housing project so it will have a certain impact on costing of projects but much depends on what rate of GST will finally be confirmed. If it is more than the existing cumulative taxes currently in force than it means that the overall cost of buying an under-construction flat will increase along with the added cost of stamp duty and registration. At the same time, GST structure is expected to have a streamlined approach as it will bring transparency in the business and will significantly reduce tax evasion through more efficient transaction-tracking methods.
Jason Kothari, CEO,
The GST Bill, which was passed in the Rajya Sabha and is being touted as India’s biggest tax reform, has been a long-standing request of the real estate sector that has been plagued by multiple layers of taxation. While the immediate benefits of the GST are expected to go to segments like logistics and warehousing, and retail – residential real estate, in the long term, should benefit from an unified tax regime, a lesser tax burden on construction materials like cement, steel, etc. This, in turn, can lead to lower construction costs for developers, who can pass on the price benefit to home buyers. The tangible benefits for the home buyer will also depend on the final rate of GST. If the rate is higher than the taxes being paid currently, it could increase the cost of an under-construction flat. However, the GST’s impact on creating a transparent taxation system and boosting business sentiments is very positive.
Arjunpreet Singh Sahni, Executive Director, Solitairian Group
By replacing a large number of indirect taxes by a single indirect tax regime across the country, Goods and Services Tax (GST) is all set to bring economic revolution in India by providing greater relief to the industries from the complex tax system and so the approval of GST Bill in Rajya Sabha is undoubtedly a step towards greater progress and growth that will surely lead to a considerable increase in the GDP of the country. Going forward, with the introduction of the new law, businesses will be motivated by the uniform tax structure. Among other industries, the real estate sector will also be immensely benefitted by the upcoming Act which will enable the real estate companies to do hassle free business across the country on the back of uniform indirect tax throughout the country on various construction materials including the steel and cement, costs of which become major deciding factor while finalizing the price of the finished products. However, it will largely depend on the final rate of GST that what actual benefits of the reduced tax burden may be passed on to the property buyers. The GST would have been more homebuyers’ friendly if stamp duty had also been subsumed into it. Still, in a nutshell, GST is here to transform the growth prospects of the real estate sector by bringing more transparency and the long prevailing gloom of slow demand is just a matter of few days.
Mahesh Jaising, Partner, BMR & Associates LLP
With the Constitutional Amendment being passed, the GST law in India has taken a more concrete form.
Real estate and infrastructure is currently plagued with myriad indirect tax issued at both the Centre and State level. At the Central level confusion still prevails on certain aspects of applicability of service tax and availment of CENVAT credit and on the State level, issues around VAT and stamp duty continues.
On the real estate side of things, GST seeks to address key longstanding issues such as overlap between VAT and service tax valuation is resolved with construction activity / works contracts being deemed to be ‘supply of services’, with no requirement of splitting the contract value bringing in a uniform tax structure across the country.
For the residential sector, the free flow of credits should reduce contracting price and consequently, the impact on customer would depend on the contractor passing on the benefits. Additionally, given that stamp duty is not proposed to be subsumed, the issues of GST as well as stamp duty applying on residential transactions continues.
On the commercial side, the traders / malls can now claim credit of GST paid on rentals. However, proposed continuation of denial of construction related credits under GST as well, would be a dampener to developers. For the SEZ players, since the GST regime is silent on zero rating of supplies of goods and services to SEZ developer and units, the SEZ scheme may not appear beneficial anymore.
For the Infrastructure sector, it appears that there could be an overall increase in costs under the GST regime. For thermal and renewable power industry, the key concern is that with power expected to be outside GST, this could lead to increase in setting up and operational costs, with no input credit and the exemptions on procurements/ equipments being removed, this in turn could result in increased power tariff affecting industries that rely on purchase of power.
While there is a free flow of credits for airports, restriction on construction related credits continues to be a concern. Being capital incentive, the key ask of the sector is either free flow of construction related credits or zero rating of construction / works contracts undertaken for the airports.
However, with this tangible step of ushering in the GST regime coupled with advocacy for fine tuning the current Model GST Law, the Industry is optimistic that GST would indeed be an answer to the current indirect tax complexities on this sector.
Deepak Kapoor, President CREDAI- Western U.P.
The implementation of GST Bill will aid in broadening the coverage of tax base, infusing transparency and also removing the present unhealthy competition among different states. Once GST is implemented, the multiplicity of taxes which leads to ambiguity would be eliminated. We are optimistic that new GST rates if kept rational would bring down the property prices due to lower input costs and as a result demand is expected to grow in near future. However, exclusion of Stamp Duty charges from the GST is a setback as home buyers will have to pay stamp duty too other than GST. Still, the benefit may go to home buyers if lower rate of GST is levied. Also it is very important that GST be implemented at the same rate in all the states to bring in uniformity.
Gaurav Gupta, General Secretary CREDAI- Raj Nagar Extension
Once GST Bill is implemented, it would boost transparency and uniformity in real estate sector. Home buyers are supposed to pay service tax and VAT presently while purchasing properties. There are also taxes like excise duty, custom duty etc to be paid by the developer which is then added to the cost of properties. GST bill is proposed to put together all these indirect taxes and replace them with a single tax. This would further reduce the costs in the hand of developers and home buyers as well. The burden on tax payers is expected to come down considerably. On the other hand, the bill will also remove the present unhealthy competition among different states which has led to different practices being followed by developers in each state. Hence such practices and tax paid by home buyers will also become uniform under GST regime.
Prashant Tiwari, Chairman,Prateek Group
GST bill will definitely be a game changer for Real Estate Sector. GST Bill will follow a single tax regime eliminating all the other taxes reducing the overall cost of construction. Under GST bill various taxes on building materials would be merged into one giving direct benefit to the builders which would then be passed on to the end-buyers. Also, it will have a positive effect on the commercial properties as commercial real estate is facing a lot of heat due to lack of funds. GST could boost this property segment as well. We are expecting that GST would help in increasing the GDP growth which would eventually help real estate to flourish in long-term.
Sushant Mutreja, Chairman, Cosmic Group
GST bill once implemented would boost transparency and standardization in real estate sector. Home buyers are supposed to pay service tax and VAT presently while purchasing properties. There are also taxes like excise duty, custom duty etc to be paid by the developer which is then added to the cost of properties. The proposed GST will replace these taxes with a single tax bringing down the cost of construction i.e. all the multiple taxes on procurement side would be replaced by GST. However, the actual impact of GST can only be seen when final rates are decided.
Zafar Akbar, Chairperson, Exalter Group
Real Estate sector will be highly benefited with the passage of GST bill as it will be a solution to a sector full of complexes and concerns. The different indirect taxes would be amalgamated into one tax easing the process of taxation considerably both for developers as well as home buyers. It is anticipated that under the GST system, there would be an even flow of credit and current restrictions on construction related credits are expected to be removed as well. Commercial properties are going to get huge benefits with this move as no credit is available on construction of developing a commercial property.