Although the Goods and Services Tax (GST) rates have already been finalised on most of the goods and services, calculating its real impact appears to be a mammoth task, especially for under-construction properties. The GST is aimed at reducing tax complications and the overall burden of the double tax, from the economy. Thus, ideally, it should not lead to an increase in the cost to the buyers.
Under the tax regime, many of the construction materials are under the 18 and 28 per cent slab. For example, steel and steel products, are mostly in the 18 per cent segment and cement and prefabricated structural components for building or civil engineering, are in the 28 per cent slab. However, as the input tax credit is available, the overall tax incidence should be neutralised.
For example, according to an official release, packaged cement is currently subject to central excise duty of 12.5 per cent + Rs 125 PMT and a standard VAT rate of 14.5 per cent. Over and above, there is central sales tax, octroi and entry tax that vary from state to state. The total tax burden is calculated at 30-31 per cent, which is 2-3 per cent more than the proposed GST rate for cement. If we apply the same logic to all the goods, probably, the tax that is incident, will be lower.
Grey areas in the GST that could determine the final price of properties
The construction of a complex building, civil structure, or a part thereof, intended for sale to a buyer, wholly or partly, is subject to 12 per cent tax with full input tax credit (ITC), subject to no refund in case of overflow of ITC. Thus, the basic construction cost may come down a little, but as the input tax credit is limited to 12 per cent, there may not be much saving in the high-end constructions. However, more clarity is needed. It is still not clear what would be the abatement available for the land cost, for calculating service tax on under-construction projects. In addition, as states have different state-level taxes, the implication of GST may not be uniform, across all states. Thus, from a cost perspective, more clarity is required about the applicability of tax credits on various transactions. It is too early to say whether the implementation of GST, will actually cool down the prices in the commercial and residential segments for the buyer.
How GST will affect developers and consumers
For developers, the implementation of GST is likely to pose challenges, for at least 6 to 9 months. With the Real Estate (Regulation and Development) Act (RERA) under implementation, as well, developers would need to focus much more on streamlining their processes and this may affect the supply adversely, in the short term. Already, the number of launches have come down significantly in the last three years. In 2016, the numbers of launches were only about 90,000 in the main cities and it was about 30 per cent less than the previous year. If there is proper application of the credit utilisation mechanism, then, developers should be able to obtain credit for various taxes paid on inputs. This will eventually reduce their overall costs. Whether the real tax incidence will be lower or higher, will be clear in some time. For buyer, the question that remains, is whether the developer will pass the savings to the consumer in the form of price correction or not, despite anti-profiteering clauses, because it may be difficult to monitor in real time.
Having said that, despite initial teething issues, the implementation of the GST should further enhance India’s attractions as an investment destination, by encouraging greater transparency and ease of operation and boost demand for real estate in the long-term, due to the positive impact on the economy as a whole.
(The writer is senior associate director, research, Colliers International India)