Since real estate plays a pivotal role in the country’s economy, it is important that policy initiatives such as GST help the sector grow, says Shrinivas Rao

Published - June 30, 2017 04:55 pm IST

The Indian real estate sector today is at the cusp of a revolution, ready to set a new order of things. With the new ecosystem being built, the coming period looks tremendously interesting for the sector. Reform measures such as RERA, Pradhan Mantri Awas Yojana (PMAY) and the prolific Goods and Services Tax (GST) will impact the industry in a manner and on a scale that no other measure had in the past.

With the real estate sector playing a pivotal role in the country’s economy, it is important that policy initiatives are also in tandem with the growth of the sector.

Although considered to be the country’s second largest employer, it is still beset with numerous imprecise implications in terms of macroeconomic conditions and fiscal policy decisions. Perhaps the biggest challenge faced is the management of the multiple indirect tax levies such as VAT, service tax, excise duty and stamp duty and registration fees. There are also various elements of non-creditable tax costs, such as customs duty, CST, and entry tax paid by the developer on the procurement side, which are then integrated into the pricing of the units. All these tax costs add up to anywhere between 20 and 25% of the price of the units, thereby rendering them unaffordable for most buyers.

Under the new GST regime, all the other indirect taxes will be subsumed and a buyer will have to pay a uniform 12% tax on the purchase of real estate, barring stamp duty and registration. This would be applicable for under-construction properties but not projects that are completed. On the other hand, the whole gamut of input credit including excise duty and CST on construction materials that are paid by developers, would also be allowed, unlike earlier.

By rolling multiple taxes into one, the cost of construction is expected to come down. The government has further directed developers to pass on any benefits that they may avail under the new tax regime to the homebuyers. Thus, with the GST expected to bring down the project cost for developers, this might just lead to properties becoming relatively cheaper, though the jury is still out on that.

In the case of resale properties, the impact of GST on buyers is likely to be very little, since buyers are not liable to pay any indirect tax for the purchase of ready-to- move-in properties.

The implementation of GST, scheduled on July 1, is widely believed to be a game-changer in the long term for the Indian economy, and the real estate sector as well, since it will subsume more than 16 major taxes and levies into a single consolidated tax, bringing the country one step closer to becoming a unified tax market.

End to cascading effect

This unified tax regime will prevent the unwanted practice of double taxation, which creates an adverse impact on real estate and other sectors, owing to their cascading effect, resulting in inflated prices for end-users. However, it remains to be seen whether this benefit gets passed on to the end-user as pricing of real estate is driven by market forces rather than costing principles.

Today, with most real estate markets across the country witnessing a slowdown, there is a lot of expectation from the recent policy measures of RERA, affordable housing schemes like PMAY and GST.

The implementation of RERA and GST, in particular, would aid in bringing transparency in the real estate sector while minimising unscrupulous transactions. Additionally, GST would provide an audit trail for better control and monitoring of the sector. However, not all share the same enthusiasm, and many are of the view that multiple layers of taxation like GST on land, raw materials and stamp duty, might actually push up the overall project cost. Besides, stamp duty will also continue to remain in force even after implementation of GST.

Thus, while prospective home buyers might have to wait a little longer before the impact of GST regime becomes clear, there is no denying that the Indian real estate is about to enter a new era of transparency and accountability, and that augurs well for the economy.

(The author is an industry expert, and CEO-Asia Pacific of Vestian)

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