According to back of the envelope calculations, homebuyers will end up paying around 20-22% in total tax compared to 14-16% if builder gets tax credit.
“This would mean multiple taxation on buyers as builder will pass on non-creditable tax to home buyers even as they pay GST on the consideration charged to them and then stamp duty for registration,” says Abhishek Jain, tax partner at EY India. According to back of the envelope calculations, homebuyers will end up paying around 20-22% in total tax compared to 14-16% if builder gets tax credit.
Here is what the industry has to say about the impact of GST on real estate:
Neeraj Bansal, Partner and Head, Real Estate and Construction sector, KPMG in India
The constitutional amendment bill paving way for introduction of Goods and Services Tax bill and rules in the parliament is a welcome step. The next step involve ratification of this amendment by majority states, post which GST bill will have to be cleared by both Central and State Governments. At an overall level the impact on the sector will hinge upon the effective GST tax rate post abatement allowed for the Land Value in property transactions.
Further, Real Estate industry has to deal with multiple tax authorities such as Service Tax and VAT and passage of GST Bill may lead to reduction in compliance bring in efficiency whereby the credit input for excise duty etc levied on materials like cement, steel etc. Also the impact of offset of GST credit on construction of building with GST paid on Rents or leases will have to be considered.
From consumer perspective, it is premature to say if GST will bring down property prices. We will have to wait for finer details especially with respect to applicable rate for real estate sector.
Lastly, the Government must consider providing a breather time to the sector to understand and prepare for GST. Global experiences suggest that there is a gap of about 1 year between introduction and implementation of GST, with recent example being Malaysia. Industry however needs to start preparing themselves for GST and organizations must undertake a detailed review of the IT systems, contracts with vendor, suppliers etc.
Abhishek Jain, Tax Partner, EY India
India is on the brink of GST and this is considered as a sign of freedom from multiple taxes currently levied on the real estate sector and the end of myriad litigation owing to ambiguity in the legal provisions. However, eligibility of credits and concessions still remain a cause of worry for the real estate sector. The Model GST Law restricts credit on goods and services acquired for construction of immoveable property (other than plant and machinery). This clause is interpretative which may lead to litigation and result in denial of credits in certain situations
Anshuman Magazine, Chairman, CBRE – India and South East Asia
This bill has been long awaited by the industry. This is a major tax reform for our economy, which will transform India into a single market. Once implemented, it is likely to have a positive impact on the real estate sector, which has linkages with over 250 ancillary industries. Unified taxation will also infuse the much needed transparency into our taxation system. While the complete effects of this bill will take some time to be realized in some sectors, overall, it is expected to have a long lasting and progressive impact on the economy, enhancing the prevalent business sentiment in the country.
Anshul Jain, Managing Director, India, Cushman & Wakefield
The clearance of the Goods and services tax (GST) Bill in the Rajya Sabha is a laudable step that would remove cascading taxes and make India’s manufacturing sector more competitive. Being a destination-based, indirect tax aimed at bringing in more efficiency and rational taxes, GST could actually help to lower manufacturing / processing, logistics and distribution costs, which could further revitalize the manufacturing and associated sectors (warehousing and logistics) by making them more price competitive and boost the overall Indian economy. This would definitely boost the PM’s ‘Make in India’ initiative and create more employment. The warehousing and logistics sector, which is essential to raise the competitiveness of India’s manufacturing sector, would be especially benefitted by the GST as it would bring about increased supply chain efficiencies. GST will ensure the abolition of various central, state and local taxes, enabling easier transfer of goods between states, which would give way to larger, centralized and advanced warehouses that would serve as hubs to service various states.
Further the bill would benefit the overall real estate sector by ensuring a uniform tax structure, thereby improving the tax compliance by the developers. The GST Bill would replace most indirect taxes that currently exist, with one tax, thereby ensuring an efficient taxation system. Under GST, developers would see lesser burden of tax on input items like cement, steel, etc., as tax credits would be available for set off at various stages. This can lead to lower construction costs for developers across all asset classes, which could likely be passed on to property buyers / occupiers.
However, the magnitude of impact of GST on the sector would hinge upon the final rate of GST decided by the government and more importantly on the actual implementation. The time frame for rolling out the GST will stay take some time and the initial period, maybe up to a year, will mainly be needed to take care of any problems that arise in implementation. Hence, actual benefits for final consumers / buyers and the overall positive impact on the economy may take longer to get manifested.
Rajeev Talwar, CEO, DLF
With the various local taxes and the central sales tax getting subsumed in one tax, the multiplicity of taxes goes away and makes it easier to deal with authorities, which has been a big issue so far. Various levies will then get rationalised which would result in more transparent taxation. This would also mean rationalisation of property prices in favour of the consumer.
Niranjan Hiranandani, Founder & MD, Hiranandani Group
This is a major reform undertaken by the Modi government and it will be impacting the economy positively. If managed well, this alone has potential to add at least 1% to India’s GDP growth. Capping the rate of tax is good. However, if the rate is increased later then it will prove to be tricky . Duality of tax authorities at state and central level is not a happy situation. If the states continue to levy stamp duty, other local taxes like labor cess and municipal taxes then it will add burden to home-buyers’ cost.
Ankur Dhawan, Chief Buisness Officer, PropTiger.com
With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost for them and can be passed as reduction to buyers. For commercial property, GST will reduce taxation as developers will be able to get input credit of GST paid for construction services against the GST charged on lease rentals. In the long run if GST can help increase GDP by 2% as predicted by experts it will in turn drive the demand for real estate hence helping real estate industry.
On the flip side GST will increase the overall cost of under construction property for buyers if the rate is higher than current applicable Service Tax rate of 15 per cent. For states where VAT is not applicable till now, state GST will be charged. If the rate is relatively lower than 15 per cent, GST can result in price neutral or lower price for consumer.
Brotin Banerjee, MD & CEO, Tata Housing
The Goods and Services Tax is likely to be a game changer for the real estate industry, which is currently facing issues of multiple taxation amounting to over 25 percent in indirect taxes. With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost and can be passed as reduction to buyers.
It will benefit real estate sector by ensuring a uniform tax structure and improve tax compliance by developers. It looks at bringing in greater transparency for the sector and may minimize unscrupulous transactions. GST will have a cascading effect for the homebuyers, as developers with more margins in their hands will be able to restructure the cost of the products in favour of consumers.
Parveen Jain, President, NAREDCO
The enactment of this law will single-handedly solve many of the challenges faced by the real estate sector and help in pulling the sluggish sector out of its long slumber. Heavy taxes that are being paid currently by the developers will automatically go down by a considerable percentage. Construction costs would be reduced to some extent and this benefit could be passed on to the customers, thereby triggering transactions in home buying. There would also be a positive impact on the commercial property segment, as commercial real estate which is already starving from funds could see some kind of a revival.
Rahul Purohit, Principal Partner, Squareyards
GST is a long awaited tax reform which is expected to improve India’s GDP by at least 2%. It aims to consolidate various state and central taxes into a single tax thus making it one of the biggest tax reforms in modern India. Its impact on real estate would be felt mostly on new constructions. This is because, it will seek to merge various taxes on building materials into one thus benefitting builders who would most likely pass it on to the buyers. However, it remains to be seen, what would be the rate of this single tax to gauge its real impact on new launches. With improved economic environment and ease of doing business we are hopeful of a positive impact on real industry.
Anuj Puri – Chairman & Country Head, JLL India
In terms of cost reduction for manufacturers, the current tax structure has three layers at the central, state and city-levels, manufacturing units have to shell out a good amount of money to transport their goods. They end up paying multiple taxes on the transportation. Once GST is rolled out, there will be a common tax structure and thus, the burden of paying multiple taxes will go away. Such units will not have a varied tax structure for transportation of their goods to different locations and will not have to pay each time they transport goods, thus, reducing the overall cost. Likewise, there will be a cost reduction for logistics players, as logistics players create a stock transfer between inventory stocking points within states to avoid a multi-tax scenario. They have a large number of smaller warehouses at various locations amounting to more than 50 small warehouses in some cases, which increases the overall cost of logistics. Also, management of such small warehouses increases the cost and reduces the overall efficiency of the logistics players.
With the implementation of GST, the tax burden will reduce and thus need to have such a fragmented warehouse system will decrease.
The real estate sector also shares positive symbiotic relationships with more than 250 sectors such as cement, steel, IT, BFSI, etc. Due to this, the benefits or drawbacks of GST on each sector will also have an indirect impact on real estate and vice versa. At this point in time, we may see very limited tangible benefits on the real estate industry but the cascading effects will definitely be higher.
Vineet Relia, Managing Director, SARE Homes
The implementation of GST is likely to improve transparency and reduce tax evasion on account of better enforcement and compliance. The home buyer in general could benefit from the introduction of GST if the rates are moderate. The fact that works contract would be taxed as a service under the model GST law is a welcome move and is expected to provide certainty on taxability of the construction sector. This should lead to reduction in tax costs as the tax would be now charged on the actual contractual base and there would not be any overlap of VAT and service tax on a certain portion of such contracts like under the current regime. However, for the developer, the aspect of valuation is a matter of concern as currently no deduction is provided under GST for value of land. This can contribute to higher tax burden considering that there is already an additional tax incidence in the form of Stamp duty on value of land.
Neha Hiranandani, Director, House of Hiranandani
The passage of Goods and Services Tax (GST) Bill is the biggest indirect taxation reform in the country. It would be a harbinger of change for the real estate sector which is currently plagued with a myriad of indirect tax issues both at the centre and state level. We hope that the bill brings in a more comprehensive and uniform tax structure that will ensure greater transparency in the sector. The GST will enable a smooth and seamless distribution network in India which will lead to in-time delivery of building material across India.
One of the positives that might come from the bill is removal of restrictions on credit utilization that will strengthen the credit chain in the system. However, since GST will be applicable on the materials purchased by the developer to construct the project, it will have a direct impact on the total costing of the project. The bill treats construction activities as “work contracts” but is silent about guidelines on valuation of land and has kept the sector away from input tax credit. This could mean higher costs for the end consumer. Also, implementation of the bill will not subsume the stamp duty levied by the states, who may increase it from time to time to meet revenue targets thereby pushing costs higher for the buyer.
It will be important to see what the final rate of GST would be because if the rate is higher than the existing cumulative taxes, it will certainly be dampener as it will increase the final cost for buying an under construction flat and defeat the purpose of the bill. While the intentions are noble and correct we feel for the bill to be successful all states must implement it together and at the same rate, else it will be cumbersome and bring additional compliance on an already strained sector.
Ashok Gupta, CMD, Ajnara India Ltd.
With the dawn of concepts like hustling in service tax coupled with reductions and various mandatory charges collected by developers these days, highlights the importance of having a same tax base which can be only answered by GST. A single tax rate across the country will promote fair practices which will further encourage transparency and less evasion in the sector that supports in future growth of demand for real estate.
Kushagr Ansal, Director, Ansal Housing
Now days, there are developers and builders who are constructing projects in different states, specially tier 2 cities and thus have to abide by the state specific VAT laws, service tax and corresponding compliances. The presence of several indirect tax components faced by the developers at present are a major cause that bring tax inefficiency in this sector. A simplified tax structure would also mean that property prices would come down considerably enabling better affordability for people looking for property options in tier 2 and 3 cities.
Deepak Kapoor, President CREDAI-Western U.P. & Director, Gulshan Homz
Implementation of GST will basically work on three major elements for this sector; simplification of tax structure, reduction in construction costs and better transparency. Speaking about its contribution post acceptance, we are predicting a nationwide realty sector growth by almost 15-20 percent than projected in the course of next 5-7 years. There will be a quick reaction towards the sector by its customers as demand is bound to increase due to reducing costs and improving transparency in the sector that has been the hurdle making this sector suffer for long now.
Dhiraj Jain, Director, Mahagun Group
Currently, the homebuyers of this sector are under the pressure of two forms of taxes; service tax and VAT on the purchase of residential units when booked prior to its completion. There are numerous components of non-creditable tax costs such as CST, entry tax, customs duty, excise duty, etc. which is duly paid by the developer on its procurement side which are basically ingredients for the cost pricing of the units.
Vikas Bhasin, MD, Saya Group
There is no doubt that multiplication of taxes will be curbed through GST, but the only question will be what rate gets decided. The only dampener for this sector can be high GST rates, such as 27 percent GST that has been making the rounds as this will counterpoise any possible gains on incremental credits. Also, stamp duty is not proposed to be incorporated under GST and will thus continue to remain as it is at present. Therefore, decreased cost of construction will take place once a lower bracket of GST is applied as the developers will be liable to pay much less than today, thereby allowing cost of units to fall which will directly benefit the end users.
Manoj Gaur, President CREDAI-NCR & MD, Gaursons India Ltd.
A well-defined GST implemented for the country will bring about a relief for this sector and its customers. Commercial realty players will be hugely benefited as all the lost Cenvat credit, which is in current regime a cost to commercial developer can be availed if GST is applied in a free flow manner that will also help in reducing costs. A much simplified single tax rate, reduced construction costs and better transparency in the sector will be much welcomed by the developers and its customers.