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Demonetisation hit the real estate sector. The Goods and Services Tax (GST), passed on March 29, 2017, also impacted the sector. Industry insiders are divided about the impact of this new taxation scheme. The real estate sector is a significant contributor to the country’s growth and is its second largest employing sector. The contribution of the sector is set to grow at a rate of 30% Compound Annual Growth Rate (CAGR) in the next ten years. It is expected to have revenues worth $180 billion by 2020.

Why GST?

GST was imposed in order to curb the effects of the multiple taxation system like VAT, central excise, and service tax and was aimed at creating a better market. This new taxation regime was expected to provide a boost to the GDP. The GST council has a four tier taxation structure - 5%, 12%, 18% and 28% are the tax slabs for different goods and services. The rates for the materials predominantly required for the real estate sector are given below.

Impact of GST on the market segments

Under the previous taxation structure, the tax always depended on the status of the construction or the property. If the property was under construction, then there was a different tax rate whereas if the property was complete, it had a different tax slab. The state in which the property was located also affected the tax rates and other duty charges.

Investors: The investors were highly impacted as previously they were subjected to all the taxation charges. Those taxes included taxes payable to the allied industries and taxes on the final outcome. The allied industries went through different tax rates and accordingly, the final market price was decided. But under the new regime, the pressure of the rate of taxes has reduced for the investors.

Developers: Developers were legally responsible to pay customs duty, entry taxes, and central excise duty among others on the material cost of construction. They were to pay an additional 15% tax on labour charges, for the architectural design and for approval costs.  However, after the GST, paying for construction became simpler. The input tax credits will help in increasing profit margins. This is expected to bring down the project cost for the developers. It is expected that the developers will pass on the price benefits to the buyers.

Buyers: The total burden of the real estate tax for the buyers rises to about 12% from the previous 5.5% under the new regime. That is a significant rise for the buyers. But it might not be so reflected on the property prices as the taxes on the input materials have been simplified and the cost of these materials keep changing.

Abir Roy Chowdhury, Director, GSPR Developers, which is a part of The Banayan Tree Group, told BE, “Initially, all our projects were running on a different taxation system. Now we have a new taxation system. This has created a lot of confusion. But with time, we will adjust to the GST regime.”

The impact of GST on affordable and luxury segments

Affordable Segment: On February 7, 2018, the government released a statement saying that no GST would be charged from the buyers. Since the GST applicable on affordable housing is about 8%, it can be well-adjusted within the input price. However, if the buyer gets the apartment at a cheaper rate as compared to the original market price then paying 8% GST maybe a necessity.

Chowdhury continued, “With the new system of taxation, things need to be simpler and specific. If there is a governmental directive that affordable housing won’t be charged with GST, then we need specific guidelines about who falls under that section and who doesn’t. There should be guidelines regarding the connotation of affordable projects.”

Luxury Segment: For the premium properties, the basic cost of construction is generally lower than other cases but the tax goes up as high as 12%.

Impact of demonetisation

Demonetisation has impacted the real estate sector. Most of the buyers in the real estate sector were home owners and not investors. While the premium property sectors experienced a reduction, the impact of demonetisation on the affordable segment was not drastic.

As Chowdhury said, “We cannot say anything specifically but it is true that all industries were in trouble during and after demonetisation. Our sector also experienced problems. We had specific issues with labour payments as the cash market was severely constricted.”

Such problems impacted the sector but it can be expected that the sector will be back on track.

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Impact of RERA in Real Estate Market

Ketan Sengupta

Luxury properties in South and East Kolkata are not just catering to the individuals of the cities but traction is being witnessed from non resident Bengalis across India and abroad as well as multi community buyers across east India. The introduction of Goods and Services Tax (GST) has created a negative impact on the luxury property market. A flat rate of 12% tax for all property under construction has led to a significant increase in the price of flats in the luxury segment. Land cost being the major component of the price of luxury properties the developers can pass on only a small portion of the price gained through input credit on construction cost, as a benefit to the customers. The sluggish market had however   forced many developers to absorb the extra cost themselves resulting in reduction of margins.

The Real Estate Regulation Act (RERA) is expected to likely revive the real estate sector by bringing in accountability and transparency. The act is also expected to revive the confidence of the buyers and at the same time it is also going to increase the difficulties in the market. The major impact of RERA being on the on-going projects in the market, there will be a lot of upheaval in the market. The law should rather state corrective measures instead of penal actions. There may also be delays in registration of projects due to lack of guidance and understanding of the act, which may in turn delay in project deliverables along with initial backlog, increased project cost, tight liquidity, rise in cost of capital, consolidation, increase in project launch time.

There will be consolidation in the market which will reduce the number of players. Small developers might cease to exist as they have to strictly adhere to the stringent rules and regulation of RERA. Big and organised players, which often found themselves being undercut by smaller rivals in the past will garner a greater share of business.

There has to be right assertion on the timely completion of projects and delivery to the consumer as per agreed terms to avoid penal action.

As defect liability period is of five years unlike in the past, developers will now have to create a back-to-back warranty with contractor and suppliers in case a challenge comes up. Starting from the contract to execution and finally handing over, documentation has to be clearly spelled out.

— The authors is CEO, Bengal Peerless Housing Development Company Ltd.

[The views expressed by the author in this article are his own.]