Goods And Services Tax transparency: Elimination of added taxes to boost investment in realty

GST is expected to significantly boost buyer and investor sentiment which has been subdued for a while.

Written by Anshuman Magazine | Published:July 11, 2017 3:26 am
Real Estate, GST An aerial view of the Oshiwara plot (the left side portion of the vacant plot) which will be used for building the high rise for the judges. The plot is situated next to the Oshiwara police station. Express photo by Kevin DSouza, Mumbai.

The goods and services tax (GST), the biggest tax reform in the history of independent India, came into effect at the midnight of June 30. It is expected to enhance tax compliance, transparency, revenue-generation and investment. Globally, more than 160 countries have adopted a uniform tax regime. The GST will not only provide thrust to the revival in the real estate sector but also protect consumer-interest, promote transparency, and bring in fair play. Post-GST, the sector is expected to witness an investment of $7 billion this year and $10 billion by 2020.

GST is expected to significantly boost buyer and investor sentiment which has been subdued for a while. In the construction segment, raw material including cement and ceramic tiles, building blocks and bricks, and prefab structural components for buildings has been put in the 28 per cent tax slab. Whereas, other components such as iron and steel are placed in the 18 per cent bracket. Work contracts pertaining to construction intended for sale are classified as a service, placed in the 12 per cent category. Ancillary sectors are likely to enjoy improved efficiency in supply chain with the removal of various federal tax barriers and creation of a common market, improving logistics and expediting delivery.

Imposition of a tax rate of 18 per cent on construction of complex, building for sale to a buyer, wholly or partly, including the value of land might lead to increase in prices of residential under-construction properties. However, total tax incidence under the GST will not burden project developers, and a major reason for this would be the 100 per cent input tax credit (ITC) on raw material facility. ITC has a dual benefit — it will increase tax compliance as it is only available upon purchase from GST-registered vendors; and its anti-profiteering provision ensures the benefit reaches the end user. An 18 per cent tax will be applicable for leasing of commercial properties, compared with the current service tax of 15 per cent. This could raise occupancy costs for corporates.

Nevertheless, the overall impact of GST on the sector is predicted to be positive. The uptake is expected to increase with sector reforms kicking in. It will encourage existing as well as potential homebuyers to invest in the residential sector, in an environment of increased transparency as well as elimination of added taxes. This reform is also likely to attract international residential investment to India, thereby providing momentum to the overall growth.

The writer is chairman of India and South-East Asia, CBRE
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