Taxes hurt so much more than daggers. The pain is even more when these taxes are structured in such a complex manner that the taxpayer despairs of getting any relief from the ever-increasing burden. Indirect tax in India is the biggest instance of this. Currently, multiple taxes such as sales tax, VAT and excise fall under the ambit of indirect taxes and result in complications at each layer. These complications result in tax evasions and defeats the very purpose. A much needed overhaul was needed in the indirect taxation system in India. The Goods and Services Tax (GST) is a considered response to this crying need.
Why is GST important for India?
The bill has been passed unanimously in Rajya Sabha. Let us understand why GST is so important for India. For long, India has been a predominantly agriculture-driven economy but now it aims to evolve into a manufacturing hub. Foreign participation is needed for this and the investors must find it conducive to invest in India. However, the ambiguity around the indirect tax regime is a big impediment to this. Also, differential taxes in states causes conflicts and adversely impacts business decisions.
GST is proposed to be a comprehensive indirect tax levy on the manufacture, sale and consumption of goods as well as services at the national level. It is believed that a uniform tax structure means increased compliance, and more tax revenues. It is touted as one on the biggest reforms of the Indian economy. This is one tax that will override about 17 taxes like the existing CENVAT, Octroi, Excise as well as State and Central tax.
Why such so much hue and cry?
Since the very beginning, GST has been caught in political imbroglios. The plan is to adopt a dual GST structure, which means one at the Centre called the Central GST, one at State level called State GST, and one integrated GST for inter-state transactions. Now the major problem foreseen is the lack of co-ordination amongst states. Obtaining unanimity regarding the Rate of GST and the IT infrastructural set-up required for sound implementation are the two major concerns.
How will it impact the Real estate sector?
Indian real estate doesn’t function in isolation. It shares a synergistic relationship with various other industries and sectors. Apart from the direct impact of GST on the real estate sector, there are many tangential factors associated with it. Some of the possible impacts are discussed below:
Broadly it was perceived that if the GST rate is lower than current rates put together, it could lead to reduced compliance and input costs for builders. However, a clause in the GST bill which says input tax credit shall not be available in respect of the “goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery” has caused some confusion. The absence of tax credit to developers may result in passing on some of the tax burden onto the buyers. Moreover, there is still ambiguity whether Transfer of Development Rights (TDR) on land will be liable to service tax, and at what rate.
It all depends on the rate of GST and opinions over the impact are divided. The home buyer could benefit if the GST rates are moderate. Completed homes will be out of the purview as a buyer already pays stamp duty to the government. It is only applicable to under-construction property and the overall cost of construction will increase for buyers if the rate is higher than current applicable Service Tax rate of 15 %.
GST is believed to further boost warehousing demand in India and about 20% of this space requirement comes from retail (consumption) sector and growing e-commerce footprints. Increased warehousing spaces will lead to shorter supply chain cycle thus lowering the cost of production. A lower per unit cost of goods will spur overall consumerism, and this will result in expansion and growth of the retail sector in India at large. So the results will be cyclical, and benefit each one across the value chain.
State restrictions and levies have resulted in complicating e-commerce. GST promises ease of doing business, so we can foresee a long term impact, not perhaps an immediate one. When the existing startups scale up and expand, they will reap the benefits of a unified market and free movement of goods. Certain cities such as Bangalore, Hyderabad and Gurgaon thrive on e-commerce. A positive headway for the sector means increased commercial activities which eventually bodes well for the residential sector.
Only time will tell…
It would actually be a little premature to conclude that GST will give the stagnant real estate sector a fresh lease of life. Nevertheless, we are hopeful of an overall conducive environment for business but will have to wait for finer points to unravel, especially pertaining to appropriate rate post abatement for the Land Value. Further clarity on input tax credit will also define the eligibility criterion for developers. It can be said that GST will bring about a change in real estate sector at certain layers, but it all depends on the nature of transaction and rate of tax. That said, if the GST succeeds in ensuring GDP growth in the long run, the real estate sector at large will definitely benefit.