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One year of one nation, one tax: Gauging the impact of the goods and services tax (GST) rollout in the Indian real estate sector

13th Jul 2018
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On July 1, 2017, the Indian economy witnessed a historical moment: the launch of the Goods and Services Tax, the single-most comprehensive tax reform post-Independence. The new tax regime subsumed various indirect taxes, such as VAT and service tax, and replaced them with a single, unified tax structure that was common in all markets across the country. 

Touted as a massive positive development, the GST was expected to fuel economic activity by bringing down commodity prices and simplifying interstate trade and commerce.

A year on, let’s gauge the impact that GST implementation has had on the real estate sector, and whether it has lived up to the billing.

Vision of GST: Enabling simplified, seamless processes

One good thing that has come out of the change in the tax regime is the simplification of the tax structure for homebuyers. Multiple taxation systems created a lot of unnecessary confusion for consumers, who had to deal with complicated calculations to arrive at their final property costs. 

By replacing those multiple taxes with a single tax and simplifying the property purchase process, GST has made life much easier for prospective homeowners. Moreover, the move to cut the GST rates of properties bought under the Credit-Linked Subsidy Scheme (CLSS) to 8% has really benefitted the long-term vision of enabling affordable homeownership for all Indians. GST’s anti-profiteering clause will ensure that property developers pass on the benefits received from input tax credit onto the buyers.

Developers, too, no longer have to pay compounding taxes on the purchase of raw materials, which has helped in significantly bringing down their operational costs. GST has also unlocked another major benefit for property developers by dissolving the various interstate taxes. 

It enables real estate players to procure their required raw materials from any part of the country, thus allowing them to enjoy pricing benefits on and seamless transportation of construction material.

Impact of GST: Cost by any other name is still cost

One of the most talked-about prospective impacts of the GST rollout was the estimated drop in residential real estate commodity prices. Under GST, developers were allowed to offset the full input credit on both services and material, where they could previously only get partial or zero benefits under the previous tax regime. 

Property costs were expected to go down, as developers passed on the benefits to the end-consumer. However, the cost reduction hasn’t yet materialised; property costs are largely still the same post the GST implementation.

While GST aimed at regularisation of tax and bring transparency in the system, the high tax rates mandated under GST have not made housing as affordable to the consumer as one would have thought during implementation. Residential and commercial projects are being effectively taxed at 12% at present, after the 1/3rd abatement offered for land value. 

Most raw materials used for construction projects also have GST of 12%. Moreover, the stamp duty – which, at 6%, is a significant factor in the pricing – is not included under the ambit of GST. To further complicate the situation, GST is being levied on items previously not liable under service tax, such as the Transfer of Rights and joint development agreements.

All these combined to increase the final housing costs by around 5-6% per unit, plus demonetization driving down property demand and leading to piling up of unsold inventory at developers’ end. With most of the developers’ capital stuck in unsold inventory, the number of new projects in the pipeline has reduced, thus creating a demand-supply vacuum which could end up making housing very unaffordable. This does not further the government’s mission to provide “Housing for All” by 2022.

Most players in the domain agree upon the need to either decrease the stamp duty, include it as a refundable component within GST, or eliminate it altogether. Subsuming the stamp duty and property registration charges under the GST aegis could help in further streamlining the home buying experience for the customer and stimulate the purchase activity within the space. The government can also look at decreasing the real estate GST to 6-8% in order to make property purchase more affordable for the end-consumer.

The ‘Real’ Verdict: Taking a long-term view of GST in real estate

Implementing the GST, in the government’s own words, was aimed at stimulating economic activity over the long-term as opposed to achieving short-term goals. This definitely seems to be the case for the Indian real estate sector one year since the move. 

Given the scale of GST, some teething issues were expected. It will be some more time before developers and consumers both adjust to the new regime. Given how complex space is, evaluating the intricate correlation between various factors and how it will impact the end-consumer pricing and property demand will take more time.

Having said that, with the levels of compliance and understanding within the domain increasing over time, we might witness some of the promised benefits materialising in earnest. It will help if stamp duty can be subsumed and overall tax is brought down. This will, in turn, fuel a fresh demand for residential real estate within the country – something which the sector direly needs at the moment. 

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