Experts are optimistic that the real estate market would remain normal to positive, in the short-term and greater positive in the long-term, post the implementation of the GST. Here’s our analysis.
Now, that the GST rates for real estate have been declared, the question on everybody’s mind is how will this impact the sector. While the real impact of the GST, will only be seen once its implementation starts, industry analysts categorically point out that one should view the changes the GST will bring about, from a short- term as well as long term perspective.
Jaxay Shah, president, CREDAI explains that “Trade and industry are the major gainers of GST as it eliminates multiple taxation at the level of states and the centre, and the consequent cascading effects. However, while for all other sectors, GST is their total indirect tax liability, for real estate, the GST rate fixed at 12%, is only a fraction of its tax burden. The real estate sector is exceptional because the GST regime does not eliminate multiple taxation. Stamp duty, levied by the states on all immovable property, would continue to remain in force even after implementation of the GST.”
Experts however believe that the actual impact of GST may vary significantly in the short-term and the medium or long term. Presently, the system would need the time to make several adjustments.
GST impact analysis
According to the JM Financial report on GST, for states with non-composite VAT (Karnataka, Tamil Nadu, Andhra Pradesh), the transaction value changes marginally from 10-11% to 12% under the new regime. With input cost credits available, developers in these regions may witness improvement in margins in case no price revision takes place (subject to the anti-profiteering clause). For the affordable housing segment, only labour cost has been given exemption from GST.
Abhishek Anand, assistant vice-president (Equity Research), JM Financial Ltd, explains how “In the current regime, states with composite VAT require developers to pay lower VAT rates on the total property value without any input tax benefit (Maharashtra, Haryana) or partial benefit (intra state offset- Bangalore). Under this regime, developers pass on the transaction cost – VAT (1%) and service tax (4-5%) to buyers (total 5-6%). Developers get offset for only the input service tax component. In the GST regime, the transaction cost increases to 12%, with input credit available on both, services and material. Property transaction costs will increase by 6%, in case no input credit is passed on by developers. If developers pass on the input credit to buyers, the property price increase could be restricted to 1-2%. In a scenario of limited demand pickup, we could see a short-term margin impact on developers in these regions, as developers look to maintain property prices (higher unit cost could further impact sales).”
Current real estate transaction tax
Source: Industry, JM Financial
Also, the rates on the construction related materials and services have been declared under the GST regime. Tax under GST on most inputs, are largely at the same level as the existing tax system. Experts pointed out that the tax incidence on major inputs such as cement, steel, lifts and elevators, etc., remains same as under the current regime. However, non-creditable tax cost on account of excise duty, CST, entry tax should be eliminated from the system, resulting in reduction of construction cost.