30 NOV 2017
Demonetization and the Goods and Services Tax (GST) hold long-term implications for the real estate sector, though issues with the implementation of the goods and service tax linger. This was the broad consensus reached at a seminar organised by the RICS School of Built Environment, Amity University and the National Institute of Urban Affairs in New Delhi on 21 November 2017. Though demonetization may not have done much to eliminate black economy and GST is still only half implemented in the real estate sector, it is likely to benefit the real estate sector in the long-term.
On being asked by the panel moderator, Prof. Sunil Agarwal, Associate Dean and Director, School of real estate, RICS SBE, Amity University, whether demonetization will be remembered as a mere blip comparable to the demonetization exercise of 1978, panellists agreed that demonetization will have a long standing impact on the real estate sector.
Prof. Jagan Shah, Director – National Institute of Urban Affairs - a premier institute for research, capacity building and dissemination of knowledge for the urban sector in India, said that “demonetization is not a blip. It has led to greater regulation and greater compliance. Digitalization of a lot of processes is removing a lot of what is known as informal/hidden economy. There is a paradigm shift towards digitalization.”
Demonetization and GST have changed the way real estate business is traditionally done. Developers now prefer joint venture projects over outright purchase of land. “There is less liquidity with developers and when there is less liquidity, developers prefer joint venture deals,” said Gaurav Gupta, Director- SG Estates. “As the market becomes more mature, developers will prefer to invest less capital in projects. The advantage of JV’s is developers with limited capital can do multiple projects.”
The positive impact of demonetization from a home buyer’s point of view is a fall in home prices. Land prices are however expected to remain the same. “It is a myth that prices of land will go down. Land is a raw material and its price is not directly proportional to the finished product. Price of land has not reduced,” said Gupta.
Kumar said the bulk of black money is generated in the formal/organized sector. Formalizing the unorganized sector is not the same as moving the unorganized sector into the tax net. “We have only 4% of India’s population under the tax net. Around 60 million out of 1.3 billion people come under the tax net. This number may go up but the question is how many of them will be effective tax filers,” he said.
Prashant Agarwal, Partner, PwC India, agreed that in terms of formalization of economy, an increase in tax filers does not necessarily translate into generation of additional revenue for the government. “The impact of demonetization on our clients has been negative in terms of a fall in demand. I don’t see demonetization impacting clients in a positive way,” he said.
The panellists felt that perhaps in a rush to implement GST, the government has not debated or resolved macroeconomic issues. GST has ignored the interest of small scale and unorganized sectors. “Prices of services such as telephone calls, insurance, transportation, restaurants will become dearer. This is inflationary,” Kumar said. Gupta of SG estates said “developers are passing on the benefits of GST to home buyers."
Prof. Sunil Agarwal pointed out that there is still a huge demand for housing, though it is now towards the affordable housing segment. He said that he welcomes the government proposal on including real estate sector under GST and he urged the industry to make this recommendation to the government. He added that the current rate of 18% should be lowered to 12%.
Prof. Agarwal and the panel said that GST at the rate of 18% on long-term leased land is not healthy for the industry and this anomaly needs to be corrected. He also highlighted that input credit on construction of commercial buildings against the lease rentals must be given. This will help REITs become a reality in India.