Sunday, 13 August 2017

GST A Positive Development for Indian Real Estate Sector

The arrival of GST is supposedly a boon to the real estate industry. All raw material inputs like cements, steel, sand, bricks, wood, flooring, sanitary-ware, electrical materials will undergo a major change of getting organised as most of these vendors have been unorganised. The entire vendor eco system of the Realty sector will get reorganised after implementation of GST.
Real estate sector is major contributor to the Indian economy, as it is estimated to contribute almost 2-3% of the GDP of the economy. It also generates huge employment, in the lower end strata of the society. With the introduction of GST, it is expected to overhaul and usher transparent business practise within the industry at all levels.
There are 16 or more different State & Central indirect taxes levied for different goods which is used in the construction sector, like VAT, Service tax, excise duty, entry tax, octroi etc. on the goods procured from the Vendors. All these are subsumed by the GST, hence the Contractors / Developers possibly could end up with additional profits overall on their costing due to savings in their purchases due to the input credit system.
This should result in passing on the benefits to the customers by way of lowering the prices, but we do not know if this would be implemented by the Developers, as pricing of real estate is driven by market forces, than on costing principles. However, if the same is not passed on by reducing the price, the overall impact to the customer could be higher as the incidence of GST would be higher than the service tax plus VAT that was being levied in the past.
Also it is to be noted that, GST is not applicable on completed projects (where the occupancy/ completion certificate has been obtained from the concerned government department)
There could be many projects, which would require transition from the tax regime of VAT & Service tax and other indirect tax laws onto GST. But, it looks that the Act has not indicated any provisions for this transition. This seems a pain point for the industry currently.
GST rate on Real Estate
The Real estate sector has been under heavy taxes in many ways due to the impact of multiple taxes on various products which go into completion of an apartment or a villa.
But with the implementation of GST, it has simplified the rate into a single rate of 12%, due to involvement of combination of products and labour (which combined VAT & Service tax, earlier).
As such, presently, the sale of land and buildings (fixed assets) has been kept out of the ambit of GST but it is likely to be taxed within in the near future. Construction of land and building will benefit from the rates declared for all major materials like cement, sand, bricks, and steel, etc. under the GST.
The impact on RERA registered Real Estate brokers/ consultants and agents are at 18% versus 15% earlier but however the total taxable turnover threshold limit has been increased to 20 lakhs.
The impact of GST on real estate sector is expected to be neutral, and overall more helpful to the Developers, and relatively less helpful to the Customers. The biggest advantage is that it brings in total transparency in costing & tracing every supplier of material who can be held accountable and responsible in future.
Author is D. Ravichandra Babu, a Chartered Accountant and an Investment banker. He specialises in the Realty sector since last 20 years, and also specialises in other verticals like Media & Entertainment, Non-conventional energy, and few other sectors, and mentors a few startups. Views expressed herein are his personal views.

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