Bitter sweet beginnings
As GST completes one year – the realty sector which witnessed initial bumps is moving towards fulfilling the goal of ‘Housing for All’.
Amidst teething troubles and glitches in the implementation framework – the landmark reform of Goods & Services Tax (GST), ushering in a unified tax regime, has helped in speeding-up real estate recovery and easing business transactions but has not entirely lived up to its promise of providing significant price relief to consumers, even one year after its implementation.
Home buyers who had pinned high hopes on GST for a reduction in property prices are disappointed as the overall cost of property purchase has not come down significantly – rather, in some cases, it has gone up.
The new tax regime, GST, which was introduced on July 1, 2017, has done away with the multiple taxations of VAT, service tax, central excise duty, octroi, etc. In the pre-GST regime, the average tax burden on home buyers was about 6 per cent, though in some states, due to a higher taxation, it was in double digits. However, in the GST regime, there is a single tax levy of 12 per cent on the sale of an under-construction residential property. Though real estate developers are entitled to an Input Tax Credit (ITC), against the purchase of construction material, its impact is still said to be marginal in terms of tax relief.
Even in the affordable housing segment under the Pradhan Mantri Awas Yojana (PMAY), where the effective tax under GST works out to be 8 per cent, after taking into account one-third abatement towards the cost of land, there has been no significant cost benefit. For states where the net taxation in the pre-GST regime was on the higher side, there has been no additional tax liability on home buyers, even if there is no cost benefit.
The real problem is that the benefit of ITC is not being accrued to home buyers in terms of cost reduction as it is not effectively being passed on to the buyers due to its complex nature and lack of clarity. There is still no clarity on the abatement available for the land cost for calculating service tax on under-construction projects, thereby having major implications on the final price.
According to Anuj Puri, Chairman, Anarock Property Consultants, the ITC confusion goes beyond the percentage of rebate to mode and tranche of rebate due to the complexity of calculating it. Ramesh Nair, CEO & Country Head, JLL India, further elaborates on the complexity of ITC: "There are different tax computation methods for different projects/phases of the same project. Further, there is the ineligibility of refund to developers under the inverted duty structure, considering inputs are procured at a higher rate of tax whereas output is charged at a lower tax rate."
Thus, builders are seeking to simplify the tedious process for filing returns and are asking for a more structured mechanism for legal protection against defaults. Real estate developers engaged in affordable housing are also not too happy with the benefit of price reduction through GST. Affordable housing crusaders like Pradeep Aggarwal of Signature Global are calling for either abolishing or, at least, significantly reducing the tax rate to push affordable housing and realise the 'Housing for All' mission.
Luxury housing developers also complain that as the land cost component is quite high in this segment, there is no significant corresponding benefit. There is a case for subsuming stamp duty on property transactions in GST to make it much more effective in terms of price benefit. However, property buyers are reaping the rich benefit of investing in ready residential properties as there is zero GST and no development risk.
There is yet another glaring aspect of GST: That it is restricted to under-construction residential projects and is not applicable to ready-to-move properties or to the secondary market. This, according to Honey Katyal, CEO, Investors Clinic (a leading real estate marketing company), may discourage buyers to book under-construction properties despite the fact that buying a ready property is always expensive and the relative impact of GST is almost nullified in that case.
Notwithstanding these teething problems, the positive impact of GST on the real estate sector as a whole cannot be overlooked. GST has made the realty sector much more streamlined and transparent, with tax predictability, thereby boosting investors' sentiments, leading to a spurt in foreign investments. And, there is the emerging asset class within real estate – warehousing, which has got a major push with GST.
A recent World Wealth Report by Capgemini reveals that key reforms like GST and RERA have proven to be a major driver for reviving real estate. After a gap of about eight years, the equity capital market is witnessing a return of realty IPOs. And, as the government sets out to refine the architecture and compliance process of GST to make it more robust, an HSBC report says that, in the coming years, GST will lead to greater formalisation.
The government's attempts to finetune GST, particularly its new proposal to reduce GST on construction material from 28 per cent to 18 per cent, will have a major positive impact on property costs, thereby realising the long-term goal of making housing affordable.
(The author is Founder & Editor, Ground Real(i)ty Media, a real estate content consultancy. The views expressed are strictly personal)