If one had to describe the present time in a single word, it’s likely that this word would be ‘disruptive’. Across the world, the speed of technological innovations and ever-changing regulations mean that dealing with uncertainties is the new normal in any business. India, too, has seen the winds of disruptive change come by and the country, its economy and people cannot help but be affected by the same.
The Indian economy, in general, can be said to have had an action-packed last 12 months, with the twin disruptions of demonetization and the Goods and Services Tax (GST) sharply impacting economic activity. The country’s burgeoning real estate sector, which also had to deal with the Real Estate (Regulation & Development) Act (RERA) to deal with, is a good place to examine how these changes have actually played out at the ground level. In this article, we shall focus on the impact of the GST on this vast sector.
GST – The Intention
The GST is probably the biggest change the Indian taxation system has seen. It required a constitutional amendment and long, detailed discussions between the central and state Governments to see the light of day. The GST came with many laudable objectives, which include:
Bringing the country under a single taxation system, thus promoting ease of doing business and removing price distortions.
Bring about greater transparency in tax collections, resulting in greater tax compliance among businesses and hence, a boost to the country’s GDP.
Elimination of the scourge of black money and a cleaner economy.
The provision of tax credit on inputs removes multiple taxation of the same product and benefits producers, service providers and consumers alike by means of lower prices.
The GST was certainly conceived with good intentions. However, nearly 4 months after it came into effect, one can say that things haven’t quite turned out as was intended, based on our discussions with various real estate firms.
GST – How it has actually turned out for real estate
The real estate sector has seen what can be described as a partial implementation of GST. While GST is levied on under-construction properties at a rate of 12%, properties which have received their occupancy certificate (OC) are exempt from the same.
The GST was supposed to subsume various indirect taxes levied on purchase of property earlier, such as the Service Tax (4.5% of property price) and the Value Added Tax (VAT) (1% of property price). The difference between the GST rate of 12% and the old rate of 5.5% (service tax + VAT) was expected to be covered by input tax credit received by developers from their suppliers. However, other indirect taxes such as the Stamp Duty on land (around 5-7% of property price, depending on the state) and registration charges (approx. 1% of property price) were left out of the GST’s ambit.
The result is a GST, which still subjects this sector (which contributes around 9-10% to India’s GDP) to multiple taxation, but has additionally also burdened all parties with a larger tax component bringing down demand by pushing up property prices.
GST – End users are having a tough time
For home buyers (particularly end users), the GST has been a double whammy. Not only has the price they need to pay for an apartment gone up, getting timely possession of their dream home too is affected. If one includes the Stamp Duty and registration charge to the GST, one finds that the tax burden on purchase of a home comes to nearly 18-20% as compared to approx. 11.5% earlier. For a home buyer looking to purchase a home for a base price of Rs. 50 lakhs, he/she now needs to pay Rs. 60 lakhs in total, instead of approx. Rs. 55-56 lakh earlier. This difference of Rs. 4-5 lakh is significant enough to deter a buyer, considering the current economic slowdown.
As GST is not levied on properties having an OC, many buyers are willing to postpone their home purchase till this stage to benefit from lower taxation. However, this has resulted in lower sales during the construction period and as a result, developers have limited cash flow for construction. This, in turn, is leading to delays in project delivery, which again affects end-users, who have to bear the cost of EMIs as well as pay rent for longer.
GST – Investors looking at other options
The other major class of home buyers i.e. investors too have not been spared. The greater tax burden on property purchases means a sharp increase in their transaction cost, which in turn, sharply brings down the returns they will get from future sale. As compared to investing in real estate, other asset classes such as equities (1%) and gold (2%) have much lower transaction costs for an investor and have become more attractive. As a result, fewer and fewer investors wish to get into property purchases, which further contribute to the slowdown in the sector.
GST – Developers struggling to deliver
If home buyers are struggling, the same is true of the developers, who are finding their financial position becoming increasingly stressed. With sales coming down due to higher taxes, their hope of getting input tax credit on raw materials from suppliers hasn’t materialized either, due to lack of clarity on the GST. As a result, developers have had to transfer the entire tax burden on to customers, which as explained earlier, hasn’t helped matters.
In addition, with lower cash flow from property sales, developers are compelled to complete projects by borrowing funds. These have left the developers with increasing debt on their balance sheets, which in turn call for greater interest payments, imposing an additional cost on them. Delay in getting regulatory approvals has worsened the problems, with developers not able to advertise and attract customers till they get these approvals.
Also, the complex procedures of filing GST returns have increased the cost of compliance on developers, affecting their ability to deliver further. While developers have welcomed initiatives such as the RERA and demonetization which have brought greater transparency and trust in real estate, the current slowdown due to the GST is a major worry.
Time for fresh initiatives
Looking at the way things have panned out post-GST implementation, one can say that as things currently stand, the GST seems to have constricted rather than encouraged growth of the real estate sector. Considering this sector is one of the biggest contributors and employment generators of the Indian economy, this state of affairs should be a concern to the Government as well and some urgent initiatives are needed to put things back on track.
Recent news concerning the GST Council considering bringing real estate as a whole under the GST, instead of the piecemeal approach currently adopted, is definitely a positive. More such steps are needed to encourage growth in this sector, which affects everyone from developers, laborers, suppliers, the government and finally, the home buyers.