Rationalisation of GST will revive real estate
Authored by Rakesh Reddy, Director, Aparna Constructions & Estates Pvt. Ltd The real estate sector has witnessed multiple reforms over the last 2 years. Chief amongst these reforms has been the implementation of GST, which came into effect on July 2017. GST was introduced to replace a complex and multi-layered taxation system with a clear unified tax. GST simplified the tax system, as well as improved compliance in the real estate sector. In the previous tax regime, homebuyers had to pay VAT, Service Tax, Registration Fees and Stamp Duty on purchase of properties that were under construction. Since VAT, Registration and Stamp Duty were state levies, property prices varied from state to state. Developers had to pay various duties including sales tax, custom duty and OCTROI for which credit was not available. This impacted property prices and subsequently the burden was transferred to the buyer. With the implementation of GST, the real estate sector witnessed a significant change in tax structure and collection as well. Under the GST regime, complexities such as construction costs were significantly reduced as the multiple taxes were combined into a single tax structure. Initially the GST on under-construction properties, after deduction of land value, was fixed at 12%. Full input tax credit for procurements was made available to builders and developers and this helped in eliminating other taxes embedded into the property cost. Projects which received the OC status were exempted from GST. This motivated buyers to purchase projects that were completed and had received the OC status despite, them being costlier than under construction projects in terms of net taxes. While GST prior to the revisions improved the demand for completed projects, it did not help in bringing about a complete revival. Reduction of GST for under construction properties was considered as a viable option to spurt the demand for new projects. This rationalisation of GST was the real estate sector’s foremost request to the government ever since GST was introduced. Apart from under-construction projects, GST also has an impact on affordable housing projects. “The Housing for All” vision that will be completed by 2022 was to provide people of low income groups with homes. This vision consisted of cost sensitive segments that had low property values, which meant even the slightest tax burden would make the segment meaningless and ineffective. Lowering the GST for affordable housing projects would bring it within reach of a wider audience. Taking into account the real estate sector’s position, the GST Council unanimously proposed to reduce the GST rate on affordable housing to 1% and under-construction properties to 5%, both without input tax credits. These new rates are applicable from April 1, 2019. The reduction of the GST rate on under-construction properties was made with the intention of improving the sentiments and thereby giving demand a much-needed impetus. However, for the benefits to have a meaningful impact, the government would need to look at a holistic approach. The government should re-look at the GST rates levied on the construction materials especially cement and other raw materials. Rationalizing the GST rates of these commodities will bring down the burden of construction cost and the overall pricing also will be positively impacted. The recent Union Budget highlighted the far-reaching impact of the real estate sector on India’s overall economic performance. The real estate sector is a strong contributor to India’s growth and is the second highest employing industry. The contribution of this sector is estimated to grow at a rate of 30% CAGR in the next ten years and will approximately generate revenues worth $180 billion by 2020. Building the physical and social infrastructure for a 10 trillion dollar economy requires a concerted effort from all stakeholders. The growth of the real estate sector has always had a multiplier effect on the growth of the entire country’s GDP and the rationalisation of the tax structure will give a strong thrust that will further accelerate the momentum of the real estate sector forward.
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