July 1 brings in the biggest taxation change in India in the form of GST. From that day leasing of land, rentals both residential and commercial and EMIs paid for under-construction houses will fall under the purview of GST. This bill has been long awaited by the industry. This is a major tax reform for our economy, which will transform India into a single market. This new tax structure will subsume existing taxes of service tax, central excise and VAT but yet there seems to be a rather mixed response to the roll out.
The positive aspect
- The bigger infrastructure giants felt it helps them expand into other states if there is a clear single tax as opposed to dealing with multiple local taxes. With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost and can be passed as reduction to buyers.
- Construction costs would be reduced to some extent and this benefit could be passed on to the customers, thereby triggering transactions in home buying.
- There would also be a positive impact on the commercial property segment, as commercial real estate which is already starving from funds could see some kind of a revival.
- The fact that works contract would be taxed as a service under the model GST law is a welcome move and is expected to provide certainty on taxability of the construction sector.
- They strongly felt that the new taxation might also bring about a rationalization of property prices in favour of the consumer.
The flip side
- On the flip side GST will increase the overall cost of under construction property for buyers if the rate is higher than current applicable Service Tax rate of 15 per cent.
- For states where VAT is not applicable till now, state GST will be charged. If the rate is relatively lower than 15 per cent, GST can result in price neutral or lower price for consumer.
- A few others expressed scepticism since the stamp duty still remains with the state authorities, which might result in additional charges such as labour cess and municipal taxes which might make the homes dearer to buyers.
- The Model GST Law restricts credit on goods and services acquired for construction of immoveable property (other than plant and machinery). This clause is interpretative which may lead to litigation and result in denial of credits in certain situations
However, the magnitude of impact of GST on the sector would hinge upon the final rate of GST decided by the government and more importantly on the actual implementation. The time frame for rolling out the GST will still take some time and the initial period, maybe up to a year, will mainly be needed to take care of any problems that arise in implementation. Hence, actual benefits for final consumers / buyers and the overall positive impact on the economy may take longer to get manifested.
Views from Mr JC Sharma, Managing Director at Sobha
Views from Mr Irfan Razzak, Chairman Prestige Group
Niranjan Hiranandani, Co-founder & Managing Director, Hiranandani Group