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GST Bill

Is The Goods & Services Tax An Elixir To All Real Estate Ailments?

Is The Goods & Services Tax An Elixir To All Real Estate Ailments?
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The Goods and Services (GST) Tax - the indirect tax reform that has been approved by the President of India post agreement in the parliament and is expected to be implemented from April 1, 2017 - is touted to be the biggest game changing tax reform in India.

It is a ‘destination based’ indirect tax reform, which aims to remove barriers due to relatively convoluted tax structure among states and facilitate the creation of a single market. With the advent of the GST council, the government hinted at keeping 50 per cent of essential commodities out of the ambit of tax.

As per the recommendations of Chief Economic Advisor Arvind Subramanian’s panel, a three-rate tax structure with essential goods at 13 per cent, demerit goods at 40 per cent and remainder goods at 15-17 per cent should be made. The revenue-neutral tax rate is proposed to be pegged at 15-15.5 per cent. Till now, 17 Indian states have already ratified the GST bill.

Ostensibly, GST may push up the GDP numbers by approx 2 per cent. Nebulously, warranted growth owing to GST holds the perception that various sectors will have a positive impact. The exact development in the sectors can be seen only after the finalization of the GST rate, meanwhile the prospects seems to be resilient and thriving. The automotive segment is expected to grow at the back of a fall in prices due to implementation of GST. Similar perception is for FMCG, real estate, logistics segment, consumer durables among other sectors. The overall and long run impact of GST on different sectors is significantly ameliorating.

GST & RERA - Realty sector’s ray of hope

Real estate segment contributes around 7.8 per cent to the GDP of the nation. Presently, real estate sector has to pay multiple indirect taxes such as stamp duty, value added tax (VAT) and service tax. Although, stamp duty will be carried forward, VAT and service tax will be supplanted by the GST.

RERA or Real Estate Regulatory Act and GST are the two ends of a rope that propose to help the real estate sector scale new heights. Both the regulations aim to target different areas of real estate where RERA provides a regulatory framework for the sector, GST will expedite by ensuring competitive and hassle free business environment. Real estate sector is expected to gain profoundly from the implementation of GST. The tax structure is expected to act as a catalyst in expansion and panacea for its issues.

On one hand GST has been acclaimed by all and the RERA has gathered mixed reviews. The act is envisaged to be pro-buyers, which aims to safeguard the interest and investment of buyers. Although the act encompasses all the possible safeguard mechanism for the buyers, it may shoot the house prices up in the short run.

Developer’s Dilemma

With a change in the policy regime by RERA, developers are set to face multiple financial impediments right from building to selling.

For instance, developers need to submit in all the pertinent information such as sanction plans, carpet area, etc to the authority that strips off the power of pre-launches by the developers, which ex-ante RERA was a quintessential route for raising capital. This may push developers to resort for higher cost capital, thereby increasing the final unit value. Similarly, using carpet area instead of super-built up area for actual useable area will make the process more transparent however, the development cost for super-built up area may eventually load off on carpet area, making it exorbitant.

The paint industry, a complimentary industry to real estate, is exposed to a tax regime varying between 24-26% on an average. With the advent of GST, rates will apparently be pegged in the range of 17-19% which is going to be highly beneficial for consumers and also holds expediting repercussion effects on associated industry such as real estate.

Another segment that highly correlates with the real estate sector is the cement industry. GST is going to certainly benefit the latter industry, on the back of reduction in the tax rates from 27-32% currently to 18-20% post GST. This will further have a multiplier effect on the real estate segment.

GST Rate – The Game Changer

The real impact on unit value in the real estate will entirely depend upon the final rate of GST and how RERA works, not only for the buyers but for developers as well. The sector is expected to grow dramatically in the long run on the account of rationalization in tax compliance, greater transparency, stability, timely delivery system, and gains in complementary sectors such as cement, steel, BFSI, etc. The outcome of the act, for now will be determined by how much the cost for developers will be negatively impacted as it already seems beneficial for the buyers.

In the medium to long run, RERA and GST will have an invigorating and thriving effect on real estate, for both developers and buyers. However in the short run, RERA may create some turbulence due to continuous transitional and stringent policy measures for businesses.

GST – A catalyst for ease of doing business

In conclusion, simplification of taxation is one of the crucial ingredients of the ease of doing business as every potential investor looks at the taxation procedure of the prospective investment destination country. India though holds various strengths in terms of demography, demand and democracy but has been challenged by complications in the ease of doing business.

GST implementation is to going to provide impetus to various reforms and polices introduced by the Government for the ease of doing business and to push India to a more simple, transparent and tax friendly regime. Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today is impacted by cascading impact of taxation.

Hence, GST is also beneficial for consumers as there would be only one tax from the manufacturers and service providers to the consumer leading to transparency and efficiency. It will prevent leakages from the system and provide relief in terms of reduced tax burden on most of the commodities.

In a nutshell, GST will promote ease of doing businesses, help in reduction of transactions costs to businesses, boost manufacturing of goods and supply of services, increase price-cost margins of manufacturers, generate employment opportunities for the vast pool of young population with enhanced production possibility frontiers and push overall GDP growth of the economy in much higher trajectory. The need of the hour is to spread awareness at a larger scale about the implementation procedure and advantages of GST to every citizen of the country.

Edition: December 2016

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