The new real estate projects are going are going to be charged at 18% under the GST tax slab. The developer community has already raised concern over how the GST will be an unmanageable burden as land may be doubly taxed. It has been clarified that all under construction flats would be charged only at 12% that excludes the land tax of 6%. There has been a marginal increase of 2% for cement and cut of 5% for coal, limestone, lignite, which would bring down construction costs. Since labour is no longer an unorganised sector, every worker should be paid wages according to the market rates and an invoice has to be produced.
The GST is expected to be positive for the real estate sector with the warehousing segment set to be the biggest beneficiary of the reform. A vast majority of construction materials are placed in the 28% tax slab (slightly higher than the current tax rates). Hence, the cost of internal fittings such as ceramic articles, tiles and granites, among others, may go up marginally. Buyers can expect a higher price across mid-end/high-end and premium/luxury segments except for residential projects launched under the Pradhan Mantri Awas Yojna (PMAY), which has been exempt from GST (was exempt from service tax previously).
In a statement, Confederation of Real Estate Developers Association of India (CREDAI), said, “Steps like RERA and GST will increase transparency in the segment. However, the extent of benefit that can be passed on to the customer will depend on various parameters such as the stage of project, land value embedded in price, total sales made, the cost of the house already paid by the customer to the developer.”
Considering the nature of real estate functioning, each project may be different for GST calculations. Similarly, cost benefits due to GST to each customer may also differ, it said. “In the current situation of transition, customers are required to be patient and cooperative. They all can be rest assured about the credibility and transparency in the process of passing on benefits since all project cost related details are mentioned on MahaRERA website,” said Shrikant Paranjape, President CREDAI.
CREDAI said it must also be borne in mind that a lot of vendors of the sectors like steel, cement, and sand have tendencies to cartel. According to it,“The cement and steel prices soar without warnings. Sand is always in short supply and not available in monsoon. It is likely that these industries may not pass on the entire benefit of tax credit. Only time will test it.”
The GST Council has categorised renting of immovable property (including commercial, industrial or residential complexes for business or commerce, either wholly or partly) as supply of service. It has also included construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, as a supply of service. The act has identified lease of land and building, any lease, tenancy, easement and licence to occupy land as a supply of service. Sale of land and completed buildings will be out of the purview of GST.
The GST Council has allowed input tax credit (ITC) on the raw materials and services used for construction activity. ITC will play a critical role in determining the final cost implications of GST on the real estate sector. Going forward, real estate players will be able to get ITC against their payment of taxes on inputs used during construction. It will also encourage increased tax compliance and reduce dependence on cash as the ITC can only be availed if raw materials are sourced from GST-registered vendors. GST also features an anti-profiteering provision, which would make it mandatory to pass on the benefits of ITC to end users - a move likely to be positive for reducing project costs.
Atul Chordia, Chairman of Panchshil Realty, told BE, “We only have completed and near ready projects in our portfolio. For our near ready projects we will be paying GST at 12% but on the cost of construction. This is usually higher for us as compared to the industry as we tend to use best-in-industry materials, much of which will fall under the 28% slab. For our completed projects and ready-to-move-in residences, GST will not be applicable. However, taxes have little or no impact on buying decisions in luxury residentials as HNI buyers are usually interested in global products, concept homes and prestige addresses. The long-run benefits of GST in the sector are obvious. For long, quality players have been overburdened with the cost of tax compliance which will now and help us pass on some benefits to our discerning customer base.”
Shishir Baijal, Chairman & Managing Director, Knight Frank India while talking to BE said, “The much awaited roll out of the Goods and Services Tax (GST) would be the single largest tax reform post-independence. Similar to the initial heartburns caused by demonetisation, it would trigger some momentary disturbances but augur well for the industry in the long term. Among the various economic policies of the Narendra Modi-led government, this will be one of the most important milestones. So, it is a welcome move. GST would be extremely beneficial for the logistics sector. With a wave of new infrastructure taking shape in the forms of ports, roads and rail networks, the new tax regime would draw massive investments which would potentially transform the look and feel of the warehousing industry. The impact of GST on real estate would be primarily tax neutral but loaded with gains for the affordable housing sector. The Finance Ministry has made it very clear that there should be no additional tax burden on consumers. Developers who did not get the benefit of Input Tax Credit in the pre-GST era will now be able to avail it. Both in the case of under construction projects and new projects, buyers are entitled to full ITC. It would also add another strategic push to affordable housing which in turn will drive the recovery of the residential sector.”
DLF Ltd, India’s largest real estate firm by market value, is also planning to pass on benefits of the input credits it will get on its under-construction projects. However, any price change will be determined by the market rather than GST, said Rajeev Talwar, DLF’s chief executive officer. “Every builder has to pass on the benefit that they get through input credits. But we need to wait for another six months to see how the market moves based on these reforms to see a price change,” he told a leading daily.
Vikas Oberoi, Managing Director, Oberoi Realty, said, “We have done our math and we clearly believe that GST is not going to increase cost to customers. If we read the finer details, the input credit takes care of the GST that is required to be paid. If everyone plays fair, home prices will mostly be cost neutral or may go up just about 2-3% in a few projects.”