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Press release

4 JUL 2017

GST could shift focus of developers to low income housing segment

The idea of GST stands out on account of its usage of ‘tax credits’. The primary purpose of this is to reduce and eliminate instances of cascading taxes or ‘tax-on-tax’ paid at different stages of the real estate supply chain.

How is GST expected to work in real estate?

GST is expected to keep real estate costs low for the affordable housing segment, but increase costs for others. Considering that almost 70 per cent of the real estate market caters to the middle to high income segment, GST could shift focus, particularly of smaller developers towards the high volume, low to medium income segment.

While it is early days yet to state the exact impact of GST on the real estate market, the above issue of being able to incorporate tax credits carries the potential to reduce costs.

There are other aspects that also need consideration such as:

  • The incorporation of a tax credit system will require all parties within the value chain to be under the GST net. Several sources of material, viz. river sand etc. are not per se from organised sources.
  • The composition scheme could be retained as an option, but only to providers of materials; it will need being withdrawn from developers.

A separate regime has been contemplated for collection of GST. The tax audit and quality control protocols will also need considerable changes to ensure that advantages of low levies in certain segments and/or materials are not misused in an inappropriate segment, viz. a developer claiming higher credit for a material not used in construction, but which is difficult to detect once the unit has been constructed.

Stamp duty remains as a single issue of contention for both buyers and sellers in the real estate market. It had been presumed that the GST regime would have subsumed or lessened the burden of this tax to an extent – except that this did not happen. The one hope that GST could offer is to provide an opportunity to the developer to reduce the consideration value, which in turn would also reduce the incidence of stamp duty as a percentage of the consideration value.

One of the positive effects of GST that is being anticipated is its impact on certain segments of real estate such as warehouses and logistics facilities that facilitate road or rail based movement of goods between States.

Earlier, routes and positions of warehousing facilities would be determined by the tax incident on the goods being transported to the warehouse; so a facility located in a low tax incidence area would be more viable as compared to a high tax incidence area, moderated by the cost of transport along both routes.

GST by itself cannot be treated as a panacea to real estate market woes – both for the buyer as well as for the seller or developer. Broader policies in land and housing/ commercial stock management, ensuring availability of appropriate financing resources etc. will be just as important to leverage the opportunity posed by GST.