To paraphrase an old saying, the only thing constant is change. The real estate sector has been undergoing a lot of change in the past couple of years. From the introduction of Housing for All scheme with the aim of providing affordable housing to the urban poor to Real Estate (Regulation and Development) Act, (RERA) 2016 (whose aim is to protect home buyers and boost real estate growth). Now with the impending implementation of GST, real estate sector is said to benefit from overhauling of the supply chain mechanism. The real estate sector is a crucial sector of the Indian economy and generates the second largest jobs India. On an average, the sector contributes 5-6% towards GDP and boosts demand for more than 250 industries connected with realty.
GST would help make the real estate sector transparent and minimise hawala transactions (money transfer without money movement). Currently, VAT, service tax, excise duty, entry tax, octroi along with other taxes and duties are charged while purchasing a property. GST would subsume these taxes and boost margins for the builder. The real estate sector is given a lot of tax breaks and benefits from SEZs as well. These tax breaks are expected to be continued post GST.
Renting of an immovable property has been classified as a service by the Government under GST. This would have the effect of driving up the house rent. Furthermore, the act of leasing or sub-letting property would also come under the purview of GST as well as providing a license to an occupant to reside in a property. The Maharashtra Government recently passed a legislative bill ratifying the changes in the renting/leasing of property.
Realty has been a heavily taxed industry although, levying 12% GST rate along with input tax credit inclusive of value of land has been warmly welcomed by the industry. It is believed that the actual incidence of tax would be similar or lower than the existing multiple indirect taxes presently levied.
Though, further clarity is being sought with respect to affordable housing (will it come under GST ambit or not), and whether homebuyers will benefit from tax abatement or not.
Furthermore, it is too early to say whether the profit margins of the developers would get hit or not. Though, with the tax levy being lowered, prices should come down. Perhaps, margins would get affected differently based on different segments vis-à-vis affordable segment or luxury segment. Since, luxury homes attract higher taxes, profit margins may suffer a dip, though it would be dependent upon the prevalent market forces at the time.
Moving forward, input tax credit would play a major role in shaping the final GST cost implications on upcoming and ongoing real estate projects and their subsequent prices. It may even help in neutralizing increase in costs. Lastly, it is too early to predict the long-term effect of GST on the real estate sector.