– Divya Seth Maggu –
The switchover to the GST regime is undoubtedly one of the biggest tax reforms in the post-independence era in the country. Predominantly conceptualised around a “one nation, one market, one tax” philosophy, the Goods and Services Tax helps eliminate India’s previous cascading tax structure; eases tax compliances; creates uniform tax rates and structure, and ensures that additional tax burdens on the consumer are reduced. From July 1 2017, GST replaces the multiple taxes levied by the central and state governments and becomes subsumed of all the indirect taxes, including central excise duty, commercial tax, octroi tax/charges, Value-Added Tax (VAT) and service tax. The transformative reform, meant to eliminate “tax on tax,” is fundamentally a tax only on value addition at each stage. Thus, the end consumer will only bear the GST charged by the last dealer in the supply chain, with set-off benefits at all the earlier stages. To ensure that manufacturers, developers and service providers pass on the benefit to the final customer, the government has also included an anti-profiteering clause in the GST bill.
For the residential real estate sector, purchase of an under-construction apartment under the previous regime attracted a Service tax of 4.5% for a flat whose value exceeded INR 1 crore and 3.75% of the value of the flat whose value was upto INR 1 crore. In addition to this, purchase of a flat attracted a VAT of 1% in states like Maharashtra. As opposed to this, purchase of a residential property under the GST regime will attract 12% GST. Purely from an output tax perspective, the increase in tax on a flat costing INR 1 crore in Mumbai is likely to be 6.5%. However, it is important to note that a developer constructing a flat is likely to be eligible to higher credits under GST regime as opposed to earlier. Previously, there were limits on the input credits, however, under GST a developer would be eligible to avail entire credits on procurements upto the fresh tax liability. Thus, if input credits are managed well, the net tax liability at 12% GST on a finished product would be small and would primarily impact the luxury apartment projects where developers work on high margins. On the other hand, for the sub 1cr apartments, GST may have no or a minor positive impact and may slightly reduce the overall tax burden. Houses in the sub 30 lakhs category will stand to benefit from GST. Owing to the input credits the developer can claim, the overall cost for the project should decrease by 3-4%. Considering the reduction in home loan rates which is a benefit spread over a number of years, the overall impact of the recent policies on affordable housing should be approximately 5-6% lower.
For the commercial real estate sector, an 18% tax will be applicable for leasing of commercial properties, as compared to the previous service tax of 15%. This can increase occupancy costs for corporates.
The warehousing sector will see changes in company strategy since now, with no tax arbitrage to be gained, decisions on manufacturing, warehousing and selling will be purely driven by the real costs of manufacturing and going to market.
There is no doubt that a unified tax structure will be a game-changer for the Indian industry, bringing in a more comprehensive and uniform tax structure that will ensure greater transparency in the economy. Demonetization, RERA and GST have all been landmark developments in the country. The fact that they have all been implemented within a short span of time, it is bound to cause short term upheaval till the time the economy gets accustomed to it. However, in the long term, all these reforms would certainly make the industry more transparent, which will boost the overall confidence of investors in India.
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About the Author
Divya Seth Maggu
Author & Entrepreneur
About the AuthorDivya Seth Maggu, Associate Director, Valuation & Advisory Services, Colliers International India.
Divya has over 10 years of varied work experience as a real estate consultant. She is well versed in advising on feasibility and development consultancy; valuation of assets and conducting real estate investment analysis. She has worked extensively on consulting and valuation assignments across cities in West and South India across assets including Townships, SEZs, IT Parks, Hotels, Industrial Properties, Logistics Parks, Integrated Developments and Organized Retail Spaces.
Disclaimer : The views expressed by the author in this feature are entirely her own and do not necessarily reflect the views of INVC NEWS.
