Could a Single Tax Help Revive India’s Real Estate Sector?

Published on 01 Dec, 2016

India’s Real Estate Sector Analysis

The Indian government’s uniform taxation system for goods and services across the nation is expected to come into play from 1 April, 2017. This is good news for several sectors in India, especially real estate.

That is of course, assuming the as yet undecided uniform rates will be favorable.

In the works for well over a decade, the Indian Goods and Services Tax (GST) is a single tax rate that will be uniformly applicable to the manufacture, sale, and consumption of goods and services across the nation. The complexity in pulling something like that off in a country as large and diverse as India cannot be overstated.  It’s also one of many other reforms meant to improve India’s prospects through uniformity and good governance.

What Does the GST Mean for the Indian Real Estate Sector?

Meant to be a single uniform tax, the GST will replace various state and indirect local taxes such as the Value Added Tax (VAT), Central Sales Tax (CST), Excise Tax, Service Tax, and Customs.

When enforced, it’ll streamline and simplify several existing processes, making things easier (and transparent) for everyone from builders down to buyers, and hopefully, boost a sector that’s been somewhat sagging of late.


Lower Cost of Construction

Commercial property developers are usually saddled with high costs/debt during construction — especially among commercial buildings that are rented out and need time to accrue any serious ROI — predominantly due to a lack of credit facilities.

The GST will ensure smooth flow of credit and reduce restrictions on the availability of construction-related credit, liquidity that could lower costs and overhead in the construction sector


Clarity, Consistency, and Ease in Taxation

There are two primary levies in the Indian real estate sector right now — Service Tax and VAT — with overlapping tax bases and no fixed rate of taxation. Inevitably, this has led to developers across various Indian states following multiple standards/practices with respect to compliance, leading to persistent disputes.

The elimination of multiple taxes (such as VAT, service tax and stamp duty) in real estate transactions could really simplify the process for both buyers and sellers.

A single GST will also do away with the plethora of tax authorities that have to be dealt with, consolidating supervision under one authority.


Lower Unit Costs for Real Estate Buyers

At the moment, Service Tax and VAT on the purchase of residential units (when a project is under construction) fall on property buyers instead of developers, thereby increasing the overall cost to consumers. All local and state taxes remain recurring until a property buyer takes final possession. Taxes that developers pay (such as excise duty, customs duty, taxes on the cost of construction materials, and CST) are also factored into the pricing of units.

Back-of-the-envelope calculations indicate that such taxes account for a 22% – 25% increase in the usual price of units.

These inflated costs inevitably dissuade buyers, resulting in low demand for property purchases. It also makes Tax compliance and the associated processing/paperwork tedious. With the GST in play, developers and buyers alike would have a consolidated simplified tax to pay, thus decreasing the cost of transactions and transfer.

Indirect taxes aren’t paid for “ready to move in” properties however; the GST won’t make a significant difference to buyers for such flats.

The overall rationalization of property prices will benefit buyers however, and demand for real estate is expected to climb after the GST is rolled out, boosting the real estate and construction sectors as well as India's economy as a whole.


The GST’s Real Impact on the Indian Real Estate Sector Depends on the Rates That Will Be Established

India’s GST Council has hinted at four tier GST slab structure— 5%, 12%, 18% and 28% — with lower rates for essential goods and higher slabs for luxury and demerit goods.  

The eventual impact of the unified GST on India’s real estate sector will depend on which of these slabs it’ll fall under.

However this plays out, the Indian real estate sector has already seen several positive developments this year in the form of a Real Estate Regulatory bill as well as the GST Bill.

Such regulatory changes are likely to have a positive impact on India’s real estate sector, helping it overcome several challenges — especially those pertaining to taxation and transparency — that often mired developers and buyers alike in long-drawn litigation.