GST impact on real estate: Affordable housing may get a boost with segment turning attractive

With the implementation of goods and services tax (GST) from 1 July, the numerous sectors in the Indian market are to be affected. Real estate is one among them. GST has brought all indirect taxes (service tax, excise duty and value added tax which apply to the procurement of goods and services during construction) under one unified tax structure; leading to a scenario where there will only remain the direct taxes (capital gains tax and wealth tax), stamp duty and GST for all property-related transactions.

The Centre has eased off the biggest challenge under GST in real estate that was posing as a hurdle for developers. By allowing deduction of land value equivalent to one-third of total amount charged by the developer it is making sure that the developer passes on the input tax benefits to customers.

The Centre has also hiked GST rate for the sector to 18 percent from 12 percent decided upon earlier. And the new rate of 18 percent would now be charged on two-thirds of the under-construction property value, which will turn around to be the same as 12 percent on the entire value of the property that was announced earlier. The only catch is that states also come out with a similar notification.

With the 1/3rd deduction, effective rate will be 12 percent which is the right treatment, says Vinod Menon, director and CEO, Citrus Ventures. However, with pre-GST effective VAT+ service tax rate being 9 percent there is still a 3 percent incremental charge. Since no retrospective claim of credits is possible, this will be a bone of contention between customers and developers as to who will bear this.

Overall the impact of GST on real estate would be basically tax neutral but full of gains for the affordable housing sector. Sachin Sandhir, global managing director – emerging business, RICS,  says it is expected to keep real estate costs low for the affordable housing segment, but increase costs for others. Considering that almost 70 percent of the real estate market caters to the middle to high income segment, GST could help shift focus, particularly of smaller developers, towards the high volume, low to medium income segment.

Representational image

Representational image

In fact, Menon, who caters to the mid-segment in Bangalore, is enthused by the tax breaks and sops given to developers for affordable housing. He thinks the subsidy provided under Pradhan Mantri Awas Yojana (PMAY), and the Rs 2.5 lakh subsidy given to customers may help save many developers to coast through this difficult time and those stuck with transitionary projects. He is constructing affordable projects under PMAY scheme. Apart from this, he has plans of constructing a villa project under PMAY urban scheme of 110 sq m catering to customers falling in the 12-18 lakh segment. He strongly believes an affordable villa in the main suburb of Bangalore at near about Rs 55 lakh will have a good appetite and fulfil aspirations of this affordable segment.

But home appliances which are a necessity for consumers, with 28 percent GST, the consumer price (market operating price- MOP) could marginally go up by 1-2 percent post implementation of GST. Kamal Nandi, Business Head and EVP, Godrej Appliances says this could have an impact on demand in the short run. However, he thinks normal monsoon, boosting agricultural economy and hike in allowances to government employees will propel demand during the forthcoming festive season.

The industrial property and warehousing segment will be the primary beneficiary of adoption of the GST system as operating efficiency is expected to increase, according to Colliers Research. Logistics companies will also look to establish large consolidated warehouses located on strategic transit corridors. Thereby, the market is likely to witness development of a hub and spoke system of warehousing, the hubs being on transit corridors and the spokes on feeder lines.

Earlier, routes and positions of warehousing facilities would be determined by the tax incident on the goods being transported to the warehouse, says Sandhir; so a facility located in a low tax incidence area would be more viable as compared to a high tax incidence area, moderated by the cost of transport along both routes.

However, during the early stages of implementation, costs are expected to increase due to the negative impact on the supply chain through-put due to teething issues, notes Joe Verghese, Managing Director, Colliers International India. Commercial leasing transactions, which constitute a major portion of overall commercial property business in India, will see an immediate increase of 3 percent in occupier commercial leasing costs. The biggest impact will be the double whammy of RERA and GST at the same time on the residential sector. Verghese adds that both of this would seriously affect supply and lead to further increase in prices.

Moreover, with regards to GST, there are a couple of aspects that need consideration, points out Sandhir, such as:

1) The incorporation of a tax credit system will require all parties within the value chain to be under the GST net. Several sources of material such as river sand etc. are not from organised sources.

2) The composition scheme could be retained as an option, but only to providers of materials; it will need being withdrawn from developers.

3) The tax audit and quality control protocols will also need considerable changes to ensure that advantages of low levies in certain segments and materials are not misused in an inappropriate segment, such as a developer claiming higher credit for a material not used in construction, but which is difficult to detect once the unit has been constructed.

Also, if the transition is to be effective, then the systems of GST Suvidha Providers (GSP) have to be validated thoroughly to ensure compliance and their confidence strengthened, so that they are clearly enabled to handle the transition related issues, says P Venkatesh, Director, Platforms and Solutions, Maveric Systems.

Thus GST alone cannot solve real estate market affliction – both for the buyer or the developer. Broader framework of policies and resources will be just as important to leverage the opportunity posed by GST.

Updated Date: Jul 05, 2017 18:11 PM

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