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November - 2016 - issue > In My Opinion

Revolution GST: Elixir to all Real Estate Ailments

Mahesh Gupta, President, PHD Chamber
Monday, October 31, 2016
Mahesh Gupta, President, PHD Chamber
Headquartered in New Delhi, PHD Chamber acts as the apex organization working at the grass-root level and with strong national & international linkages to promote industry, trade & entrepreneurship.

GST – The game changing biggest indirect tax reform has been approved by the President of India post agreement in the parliament by 122nd Constitutional amendment, is to be implemented expectedly from April 1, 2017. It is a ‘destination based’ indirect tax reform which aims to remove barriers due to relatively convoluted tax structure among states and facilitate the creation of a single market. With the advent of GST council, government hinted on keeping 50 percent of the essential commodities out of the ambit of tax. As per the recommendations suggested by Arvind Subramanian Panel, a three-rate tax structure with essential goods at 13 percent, demerit goods at 40 percent and remainder goods at 15-17 percent should be made, wherein revenue-neutral tax rate to be pegged at 15-15.5 percent. Till now, 17 Indian states have already ratified the GST bill.

Ostensibly, GST may push up the GDP numbers by approx 2 percent. Nebulously, warranted growth owing to GST holds the perception that various sectors will have a positive impact. The exact development in the sectors may be conceived only after the finalization of GST rate, meanwhile the prospects seems to be resilient and thriving. Automotive segment is expected to grow on the back on fall in prices due to implementation of GST. Similar perception is for FMCG, real estate, logistics segment, consumer durables among other sectors. The overall and long run impact of GST on different sectors is significantly ameliorating.

Real estate segment contributes to around 7.8 percent of the GDP. Presently, real estate sector works under the auspices of multiple indirect taxes such stamp duty, VAT and service tax. Although the stamp duty will be carried forward, VAT and service tax will be supplanted by GST. RERA or Real Estate Regulatory Act and GST are the two ends of a rope that postulates to pull the real estate sector to new heights. Both the regulations aim to target different areas of real estate where RERA provides a regulatory framework for the sector, GST will expedite by ensuring competitive and hassle free business environment. Real estate sector is expected to gain profoundly from the implementation of GST. The tax structure is expected to act as a catalyst in expansion and panacea for its issues. On one hand GST has been acclaimed by all, RERA gathered mixed reviews. The act is envisaged to be pro-buyers, which aims to safeguard the interest and investment of buyers. Although the act encompasses all the possible safeguard mechanism for the buyers, it may shoot the house prices up in the short run. With change in policy regime by RERA, the developers are set to face multiple financial impediments right from building to selling. For instance, developers need to submit in all the pertinent information such as sanction plans, carpet area, etc to the authority that strips off the power of pre-launches by the developers, which ex-ante RERA was a quintessential route for raising capital. This may push developers to resort for higher cost capital, thereby increasing the final unit value. Similarly, using carpet area instead of super-built up area for actual useable area will make the process more transparent however, the development cost for super-built up area may eventually load off on carpet area, making it exorbitant. Paint industry, a complimentary industry to real estate, is exposed to a tax regime varying between 24-26 percent on an average. With the advent of GST, rates will apparently be pegged in the range of 17-19 percent which is going to be highly beneficial for consumers and also holds expediting repercussion effects on associated industry such as real estate. Another segment that highly correlates with the real estate sector is the cement industry. GST is going to certainly benefit the latter industry, on the back of reduction in the tax rates from 27-32 percent currently to 18-20 percent post GST. This will further have a multiplier effect on the real estate segment.

The real impact on unit value in the real estate will entirely depend upon the final rate of GST and how RERA works, not only for the buyers but for developers as well. The sector is expected to grow dramatically in the long run on the account of rationalization in tax compliance, greater transparency, stability, timely delivery system, and gains in complementary sectors such as cement, steel, BFSI, etc. The outcome of act, for now, will be determined by how much the cost for developers will be negatively impacted, as it already seems beneficial for the buyers. In the medium to long run, RERA and GST will have an invigorating and thriving effect on real estate, for both developers and buyers. However in the short run, RERA may create some turbulence due to continuous transitional and stringent policy measures for businesses.

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