GST may bring a lot of relief to the real estate sector. Supply chain mechanism in real estate sector to be revamped after implementation of GST.
Real estate sector is one of the most pivotal sector of the Indian economy. Real estate sector plays a vital role in employment generation in India. It ranks second just behind agriculture.The importance of Real estate sector can be understood with its average 5-6% GDP contribution and stimulating demand for more than 250 ancillary industries.
The real estate sector had a substantial growth of 22% in its private equity investments from 2015 to 2016. At the time of the third quarter of 2016, there was a 9% increase in investment for residential properties from the previous quarter.
GST would bring a lot of transparency in the real estate sector and minimize unscrupulous transactions. Under the current tax laws, VAT and Service tax charged by different Contractors and excise duty, entry tax, octroi is paid on the procurements. GST law will increase the margin in the hands of contractor/developer by removing all the above-mentioned taxes.Now whether this benefit gets passed on to the end-consumer is unsure as pricing of real estate is driven by market forces than on costing principles.
Real estate sector enjoys a lot of benefits from facilities in SEZ and same are expected to be carried forward in GST.GST will help in filling the overwhelming gaps currently existing under the supply chain management process.
There will be many projects of developers which would require the transition from current tax laws onto GST. GST model law did not specify any provisions for the transition.
It is still not clear whether there will be a different tax rate for renting/purchasing of residential/commercial properties.Composition scheme in various states all over India has different VAT rates which range from 1-5 %.
There are many current litigation cases active due to non-clarification on the aspect of transfer of developmental rights.Since in GST the point of taxation is “Supply” and there is a refund mechanism for input credit, there will be an issue with the rise in the amount of working capital required. Small contractors involved in the real estate sector might not be able to withstand the demand of the raised working capital. Though the real estate sector would benefit from streamlining of all the taxes and processes
In Real estate sector, there is a huge percentage of each project expenditure goes unrecorded on the books currently. GST will cut down this percentage due to cloud storing of invoicing. Real estate sector will also benefit with new tax law having a positive effect on all ancillary industries.
The impact of GST on real estate sector cannot be completely assessed as it largely depends on the rate to be declared under GST. Though, still there is going to be a substantial benefit from GST as it will bring a lot of required transparency and accountability. Developers/Contractors would reap the benefit of many taxes which will be subsumed by GST.
“Real estate sector should be happy with GST even if the rate declared is higher than current rate”