An overview of the recently passed Goods and Services Tax (GST) Bill.
The second largest employer in the country after agriculture, India’s realty sector is expected to touch US$ 180 billion by 2020. Highlighted in a recent report by the India Brand Equity Foundation (IBEF), the industry is slated to grow at 30 per cent over the next decade. Currently, the housing sector alone contributes 5-6 per cent to the country’s Gross Domestic Product (GDP), and the passage of the Goods and Services Tax (GST) Bill by the Parliament last week, will boost the sector’s growth further.
Advantages to the sector
One of the biggest indirect taxation reforms in the country, the GST Bill brings in a more comprehensive tax structure for the sector. Presently, a number of taxes are levied by the State and Central governments, and these will be merged into a single tax. This will not only ease the process of taxation, but will also reduce the burden on developers. Apart from these indirect taxes, a developer incurs several non-creditable indirect expenses along with the taxes involved with these expenditures – VAT/CST, customs duties, service tax, and excise duty. The Bill will do away with these tax inefficiencies as well and experts are hoping that the proposed GST structure will have a progressive and streamlined approach. The sector has links with over 250 other industries and these tax reforms will improve relations with each of these industries by way of reduced costs and better mobility of goods.
Clarity for buyers
The impact of GST on buyers of resale properties is likely to be very little as indirect taxes are not levied on the purchase of ready-to-move-in homes. For under-construction properties, however, value-added tax (VAT) and service tax are charged. For such properties, buyers take home loans and make their investment plans based only on the value of the property, unaware of the various additional taxes they have to pay for. The introduction of the GST will bring forth a uniform tax, making it convenient for buyers only if the rate will be lower than present tax rates.
Reduced manufacturing costs
An indirect tax aimed at regulating the sector and making it more efficient, the GST will also help lower manufacturing, processing, logistics, and distribution costs. Competitive pricing could further boost manufacturing and associated sectors. By creating more employment, it is definitely a move to strengthen the ‘Make in India’ initiative. The warehousing and logistics sector would be especially benefitted as it would bring about increased supply chain efficiencies. As the GST will ensure the abolition of various central, state and local taxes, it will enable cheaper transit of goods between states, which would give way to larger, centralised and advanced warehouses that would serve as hubs to service various states.
One of the long-term benefits of the Bill includes transparent real estate transactions. With a uniform tax structure in place, it will make the process of buying simpler for both buyers and developers. The GST will also be applicable to construction materials procured by the developer and these costs will also be among the deciding factors before finalising project rates. The reduced tax burden will be passed on to buyers, but this, however, will largely depend on the final rate of GST.
Credit on commercial properties
Presently, there is no credit facility available on construction for commercial projects that are rented out by developers. These credits are said to be included under GST and will have a positive effect on rentals. Additionally, if business entities can take credit of the GST paid on the rentals, it will help the developer community in negotiating better rentals.
Disadvantages of the Bill
While a single tax will make it easier for developers and buyers, it might increase the overall cost of under-construction properties if the rate is higher than current applicable service tax rate of 15 per cent. GST will also be applicable in States where presently VAT is not applicable and this could reduce housing demand. As stamp duty payable on property is not included in the GST, it could be an additional dampener for buyers.
Exclusion of land
Realty transactions are divided into three parts – the value of goods and materials, value of services, and value of land. Currently, most States apply VAT to the goods portion and the Centre taxes the services portion, with no explicit tax on the transaction value of land. This division cause complexities in property transactions. Another issue that could arise is that of industries being denied the right to claim credit for the taxes applied on inputs to construction of factories, offices and infrastructure. This would lead to cascading of taxes and increase manufacturing costs.
Tax on residential property
In the present scenario, there is no service tax applicable on renting immovable property, particularly for residential purposes. But service tax and VAT is implemented on the construction work. Realty players are unsure if the proposed GST will offer differential tax for residential properties. Segments to watch on the GST front are under-construction flats and rental flats, which are expected to come under the ambit of GST. GST will apply to the materials that a developer procures for building a residential project, so there is a direct correlation to the overall cost of construction.