 | The Goods and Services Tax (GST) has finally become a reality, close to one and a half decades after it was first proposed. The journey of moving towards a single-tax system has not been particularly smooth as the GST has faced innumerable challenges due to issues regarding its structure, tax bracket and subventions for states that may face revenue losses. However, despite the challenges and resistance, the determination of the government to implement a single-tax system has shown results, as the tax comes into force from today. While a landmark tax like this is expected to have far-reaching implications for all sectors in the economy, through this market flash we are trying to highlight the impact that GST will have on the real estate sector.
Basics of GST
GST is an indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.
GST is a destination-based tax and will incorporate the various indirect taxes currently levied by the central and state governments, such as excise duty, service tax and value added tax (VAT). There will be two components of the GST – the Central GST (CGST) and the State GST (SGST). Both central and state governments will simultaneously levy the GST across the value chain, on every supply of goods and services. The central government will levy and collect Central Goods and Services Tax (CGST), while the state governments will levy and collect the State Goods and Services Tax (SGST) on all transactions within the state. For inter-state transactions and imported goods or services, an Integrated GST (IGST) will be levied by the central government.
More than 160 nations across the globe have already adopted a unified indirect tax structure. In Asia, countries such as Indonesia, Thailand, Singapore and the Philippines adopted GST during the 1980’s and 1990’s, creating an effective tax system, with comparatively lower administration and collection costs. It has enabled countries like Singapore to lower its corporate and personal income taxes, which in turn has encouraged more foreign investment and stimulated the over-all economic growth in the country.
Impact of GST on the RE sector
Construction Costs
- A vast majority of construction materials have been placed in the 28% tax slab (slightly higher than current tax rates), hence the cost of internal fittings such as ceramic articles, tiles, granites, amongst others may go up marginally; an increase that might be transferred onto buyers. An exception to this will be residential projects launched under the Pradhan Mantri Awas Yojna (PMAY), which have been exempted from the ambit of the GST
Under-Construction Properties
- Under GST, an under-construction property is covered under works contract and classified as a service. The GST Council has decided to tax construction of a complex, building for sale to a buyer, wholly or partly, at 18%, which may lead to an increase in the cost of under-constructions properties. However, partly addressing the need of the industry to exclude land from the value of computing GST; the 18% tax would be chargeable on only two-thirds of the under-construction property value, which brings the effective GST rate on under-construction properties to 12%
- The Council has allowed for 100% Input Tax Credit (ITC) on the raw materials and services used for such construction activity. This will encourage transparency, increase tax compliance and reduce dependence on cash because the ITC can only be availed if raw materials are sourced from GST registered vendors; even though the sector might take its own time in adjusting to the new guidelines, given the extent of unorganized segment in the industry
Completed Properties
- Since completed and ready to move in properties cannot be classified as a service, both have been kept out of the purview of GST. Stamp duty and registration charges have also been kept out of the ambit of GST
Residential-Rented Apartments
- Rental income from residential properties used for residential purposes would continue to be exempted under the GST regime. Such properties were also exempted from service tax previously
Occupation Costs for Leased Premises
- Leasing of commercial, retail and warehousing properties has been put in the 18% tax slab, as compared to the current service tax of 15%. This is likely to increase the occupancy costs for occupiers in these segments
Warehousing Segment
- As GST comes into practice, the Indian warehousing sector is poised for structural changes in its operation dynamics. The current system of interstate taxation in India results in space take up being dictated by lower taxes (rather than operational efficiencies) as well as the domination of the warehousing sector by a large number of unorganised players. Once the GST comes into play, the focus of players is likely to be on supply chain efficiencies which will result in consolidation of warehouses and entry of national-level/credible players
Retail Segment
- For the retail segment, GST implementation is likely to be a mixed bag. Some categories such as FMCG, affordable end of the apparel and footwear category and luxury cars are likely to benefit as the GST rate for these categories are lower than the existing taxation rates. For certain other categories such as furniture, consumer electronics, etc. there is likely to be a slight increase in cost, as the GST rates for these categories are marginally higher than the current rates. On an overall basis, the implementation of GST would lead to rationalization of tax at different levels, reduce compliance costs; thereby, resulting in an improvement in ease of doing business and movement of retail goods
Way Forward
The government has been very reactive to the demands of various industries and has been continuously reviewing rates (rates for 69 goods were revised downwards in June) post the first announcement of rates in May 2017. While we may argue that GST works best in an organized economy, where the supply chain is streamlined and value additions at each step are clear; however, implementation of GST could be the first step towards India’s markets becoming more organised. As a large majority of goods used in the real estate and construction segment are sourced from vendors operating in the unorganised space, identifying value additions at each stage for evaluating input tax credit is likely to be a challenge. While the government has done its best by bringing in the regulation at the right economic cycle (low inflationary period), however the industry will need some time, before it completely understands the implications of the tax rate on operations and compliance. While there will be short-term disruptions, in the long term we feel that the benefits of efficient supply chains and lower compliance costs will eventually trickle down to make the reform the “shot in the arm” for businesses in India.
Contact:
Abhinav Joshi
Head of Research - India
91 124 4659700
abhinav.joshi@cbre.co.in
Vidhi Dheri
General Manager - India Research
91 11 42390200
vidhi.dheri@cbre.co.in
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