GST impact on the realty sector: The short to long-term analysis

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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

 

Bangalore Mumbai Pune Chennai Gurgaon
VAT 4.0% 1.0% 1.0% 2.0% 4.0%
Service Tax 4.5% 4.5% 4.5% 4.5% 4.5%
Stamp Duty 5.7% 5.0% 5.0% 7.0% 6.0%
Registration Charges 1.0% 1.0% 1.0% 1.0% 0.5%
Total Taxation 15.2% 11.5% 11.5% 14.5% 15.0%

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.

 

See also: Is GST bad news for home buyers and renters?

 

GST on input materials related to real estate sector

 

HSN Description of goods Rate
Chapter 72 Steel 18 per cent
2523 Cement 28 per cent
6802 Marble and granite 28 per cent
2515 Blocks of marble and granite 12 per cent
Chapter 68 Sand lime bricks and fly ash bricks 12 per cent
2505 & 2517 Natural sand, pebbles, gravel 5 per cent
8428 Lifts and elevators 28 per cent

Data provided by: BMR

 

“The 12 per cent GST levied on finished products or works contract, is a welcome move because of availability of input tax credit on products utilised for construction. The availability of credit for taxes paid on inputs such as cement, steel, paints and other items, will bring down the burden of development, inversely benefitting the industry. While the input tax credit will neutralise the overall impact, a lot will depend on the proper implementation and functioning of the indirect tax claim system. Another factor that needs consideration, is the kind of property being developed. In the case of a premium development, the entire input tax credit is not sufficient to bring down the fresh tax liability to nil because of the taxes paid on other expenditures, having negligible impact”, opines Surendra Hiranandani, chairman and MD, House of Hiranandani, on the introduction of the Goods and Service Tax (GST).

The change in the tax system impacts the whole macro-economic setup, and therefore, the actual impact may vary significantly in short to long term period. As of now, the experts are very much optimistic that the realty market would remain normal to positive, in the short-term and greater positive in the long-term. Timely implementation, acceptance and systemic readiness, would further determine the actual impact of GST on the market, in the coming days.

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