Mumbai: Well over nine months after the rollout of the Goods and Services Tax in the country, real estate developers are yet to get clarity on its nuances that impact their operations, leaving home buyers in the lurch when it comes to the purported benefits that were to accrue to them under the new indirect tax regime.
In a report released on Tuesday, advisory firm PricewaterhouseCoopers (PwC) and real estate consultancy JLL analysed the impact of GST on residential markets and highlighted the costs and benefits of the new tax regime for developers during various stages of construction. More importantly, the report sheds light on what GST means for the ultimate homebuyer.
According to Abhishek Goenka, partner and tax leader of real estate at PwC, while GST is essentially a tax built on the principle of uniformity, its implications on the residential market are far from uniform. The effect of GST faced by the developer varies based on the location of the project, the type of project, and the phase of completion.
For example, since the tax rate has been pegged at 18% with one-third of the total land value being exempted from tax, this brings the effd’-cxfoective tax rate to 12%. However, this will only benefit projects where the land value is close to one-third of the total contract value.
Projects where the land cost exceeds this will not be sufficiently covered by the tax deduction. This is more commonly observed in Tier-I cities like Mumbai and Bangalore where the cost of land is significantly higher than Tier-II and Tier III cities.
In other words, the affordable housing segment (with low-cost houses of 60 sq m per house) enjoys the greatest advantage. This advantage steadily decreases as one moves towards the luxury and ultra-luxury segment.
Another major impact of GST is the availability of input tax credit for developers. Kunal Wadhwa, partner (indirect tax) at PwC, elaborated on the same, “Input tax credit is likely to reduce costs in terms of procurement of materials and services used in the construction of the building. This should then reduce the cost of construction for developers.”
Consumer Impact
In the realm of residential markets, the consumer’s plight is very closely related to the developer’s. The GST regime expects developers to pass on any input tax credit benefits they receive to the average homebuyer in the form of reduced prices.
In effect, this means a developer who has benefited from a reduction in construction costs due to input tax credits and rationalised tax rates, has to pass on the benefits to the end user. However, since the method of computing such benefits is not prescribed clearly, it has so far been difficult for developers themselves to realise these benefits in the first place.
In addition to this, recent clarifications by the government deem inputs already consumed as ineligible for transition credit, making under-construction projects a less appealing prospect than projects that started post-GST. For most projects, the benefit for developers will not exceed 3%, resulting in a negligible reduction in consumer prices.
Some developers have started schemes wherein they ask consumers to book their flats by making payments in advance. However, buyers must be careful about falling for such offers as these payments are also liable to being taxed under GST.
The report also pointed out that the customers who purchased property in the pre-GST era and are still paying installments will face the maximum negative impact. Properties that received Occupancy Certificates after 1st July 2017 will not be covered by the ambit of GST.
Ramesh Nair, CEO and Country Head, JLL, said there is a trust deficit in the residential markets due to fluctuating consumer prices. This is backed by the statistic that projects sold on completion increased from 15% to 30% after GST.
However, the real estate market is much more influenced by other factors such as demand-supply dynamics and growth prospects, making it impossible to pinpoint how much of this lack of confidence is caused by GST.
Path Ahead
There is a growing need for the government to give developers clarity on certain issues centred around the GST. One of the major issues, as identified by a dipstick survey conducted by JLL, is the lack of a mechanism to offset increased raw material costs. This will undermine any input tax credit and make it impossible for the developers to pass on the benefit to the consumers.
The government will constantly need to be in touch with industry players and keep channels of communication open – which it has so far. The report concludes by stating that as more new projects are added to the market under the GST regime, the policy will likely overcome this difficult period of transition and result in long-term benefits for the developers as well as consumers in residential markets.
