GST may bring down construction cost: Will it cool down residential, commercial property prices?

One good thing that GST purports to do is that it will help cut cash component in construction, as inputs have to be sourced from registered vendors to get input tax credits. This step will decisively cut down on the black money component in real estate. The GST returns process ensures that both suppliers and recipients of goods and/or services are liable to disclose transaction details w.r.t. value, amount, GST rate, etc.  This will promote transparency in the ecosystem, and eligibility of credit will encourage participants to declare details, thereby minimising scope for cash-driven transactions, says Sunil Sharma, VP, Marketing & CRM, Mahindra Lifespaces. Secondly, the GST rate set at 12 percent for the real estate could possibly push affordable and mid-level real estate prices marginally lower, thinks Tushad Dubash- Director, Duville Estates. [caption id=“attachment_2578752” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] The construction of a complex building, civil structure is under 12 percent tax bracket with full input tax credit (ITC) subject to no refund in case of overflow of ITC. Thus, the basic construction cost is likely to come down a little while luxury real estate may not be benefited, as most of the construction goods are likely to incur 28 percent GST rate. Further, improved efficiency in logistics should also help reduce prices of goods, says Amit Oberoi, National Director, Knowledge Systems, Colliers International India.  This should likely result in lower cost of production, and therefore be passed to the consumer. However, one big anomaly is that the cost of production amount will vary from project to project, depending on the specification of materials used and project structure, in terms of works contract etc. Also, a number of issues are still unclear like clarity for the buyer on abatement rate that accounts for the proportion of land cost in the total price of the end product, adds Oberoi. Thus it is too early to say whether implementation of the GST will actually cool down the prices in the commercial and residential segments. Thirdly, the input credit provisions, if managed efficiently, will help improve cash-flow of the developers. The ITC facility will also reduce the cost of raw material procurement says Chintan Sheth, Director, Sheth Corp. With input credits available for paying excise for cement, fittings, steel etc, will ease off the developer’s cash problem. Now what developers need to do is focus on streamlining their processes. Another factor that needs consideration is the kind of property being developed. In the case of a premium development, the entire input tax credit is not sufficient to bring down the fresh tax liability to nil because of the taxes paid on other expenditures, having negligible impact, says Surendra Hiranandani, Chairman & MD, House of Hiranandani. But, in reality how GST impacts consumers and small and big real estate businessmen, only time will unfold. A lot of customers will be curious to know about service tax and VAT reduction in terms of the total output. The consumers are currently in a mindset that they probably will get a 1.5-2 percent in tax reduction which actually depends on the service inputs and benefits that the developers would get, says Amit Wadhwani, Director, Sai Estate Consultants. “Service input” tax benefits that the developers will get will have to be passed on to the consumers which will depend on the independent possessions of the consumers. Not all developers will benefit from this, also the percentage of the benefit would benefit. This needs to be communicated with the consumers. In Maharashtra, currently the end users are paying 11% as an outflow, after GST it will be about 9.5 -10.5 percent. All depends on the land abatement otherwise it is going to be a disaster for metros as homes are required in great numbers in metros says Rajan Bandelkar, Vice President, NAREDCO West. Earlier, the service tax was 5 percent after abatement. Now at 12 percent service charge, in metros it will impact much. Also, the amount of taxes that one ends up paying accounts for nearly 35-40 percent of the total apartment value. So, the taxes are now more than one-thirds. Why is there no abatement here? queries Bandelkar as the Government is the biggest partner in real estate and wants to make affordable housing a success, so it should give tax holidays for real estate especially for affordable housing. Land transactions are already subject to local taxes such as stamp duty and registration. The issue with land is that circle rates have not kept pace with the market dynamics. It is relevant to note that the land component as part of construction of an immoveable property has been brought under GST as no abatement has been allowed under the new tax regime, says Ramesh Nair, CEO & Country Head, JLL India. By itself, imposing GST on plain land transactions with the associated local levies would just result in land costs rising further. Nair says real estate is already covered under GST by means of classifying construction of immoveable property as a service and taxing it appropriately under GST. Also, renting of commercial premises is covered under GST. Sale of completed projects was never contemplated under GST. GST is meant to be anti-inflationary while increasing statutory compliances and it is the mandate of local governments as well to ensure that local laws ensure transparency in land dealings and transactions. GST by itself would just increase the tax burden on land transactions, Nair says, and especially in a time when government is pushing its agenda of affordable housing at a national level. And can GST be effective in eradicating corruption from govt offices? Although with the introduction of online data base systems that link all points of sales, it is likely to reduce corruption. More vital point is that the simplification of tax burden drive will need to be efficiently handled by the accounting workforce across India says Nishank Goyal, CEO, Masters India. There could arise functional as well as technological hurdles under GST. Functional challenges range from understanding transitional provisions to redesigning supply chain strategy, forming new business policies and framework, studying the impact on cash-flow and profitability, and addressing sector specific issues. Technological challenges could mean item level detail in invoices, maintenance of trail of all amended entries, with reconciliation of sales and purchase register with vendors and buyers, on a minimum three monthly returns, other events such as auto reversals demands extensive use of technology within any tax entity. For GST to be a success, readiness of the workforce also plays an important role, says Goyal. A lot, therefore, will depend on the proper implementation and a proper system of claiming tax credits through this seamless all-inclusive channel available July onwards.