The switchover to the GST regime is undoubtedly one of the biggest tax reforms in the post-Independence era. Predominantly conceptualised around a "one nation, one market, one tax" philosophy, the Goods and Services Tax helps eliminate India's previous cascading tax structure, eases tax compliances, creates uniform tax rates and structure, and ensures that additional tax burdens on the consumer are reduced.
From July 1 2017, GST replaces the multiple taxes levied by the central and state governments and becomes subsumed of all indirect taxes, including central excise duty, commercial tax, octroi tax/charges, Value-Added Tax (VAT) and service tax. The transformative reform, meant to eliminate "tax on tax", is fundamentally a tax only on value addition at each stage. Thus, the end consumer will only bear the GST charged by the last dealer in the supply chain, with setoff benefits at all the earlier stages. To ensure that manufacturers, developers and service providers pass on the benefit to the final customer, the government has also included an anti-profiteering clause in the GST bill.
For the residential real estate sector, purchase of an under-construction apartment under the previous regime attracted service tax of 4.5 percent for a flat whose value exceeded Rs 1 crore and 3.75 percent of the value of the flat whose value was upto Rs 1 crore. In addition, purchase of a flat attracted a VAT of 1 percent in states like Maharashtra. As opposed to this, purchase of a residential property under the GST regime will attract 12 percent GST.
Purely from an output tax perspective, the increase in tax on a flat costing Rs 1 crore in Mumbai is likely to be 6.5 percent. However, it is important to note that unlike earlier, a developer constructing a flat is likely to be eligible for higher credits under the GST regime. Previously, there were limits on the input credits. However, under GST, a developer would be eligible to avail of entire credits on procurements upto the fresh tax liability.
Thus, if input credits are managed well, net tax liability at 12 percent GST on a finished product would be small and would primarily impact the luxury apartment projects where developers work on high margins. On the other hand, for the sub-Rs 1crore apartments, GST may have nil or minor positive impact and may slightly reduce the overall tax burden. Houses in the sub-Rs 30 lakh category will stand to benefit from GST. Owing to the input credits the developer can claim, the overall cost for the project should decrease by 3-4 percent. Considering the reduction in home loan rates which is a benefit spread over a number of years, the overall impact of the recent policies on affordable housing should be approximately 5-6 percent lower.
For the commercial real estate sector, an 18 percent tax will be applicable on leasing of commercial properties, as compared to the previous service tax of 15 percent. This can increase occupancy costs for corporates.
The warehousing sector will see changes in company strategy since now, with no tax arbitrage to be gained, decisions on manufacturing, warehousing and selling will be purely driven by the real costs of manufacturing and going to market.
There is no doubt that a unified tax structure will be a gamechanger for the Indian industry, bringing in a more comprehensive and uniform tax structure that will ensure greater transparency in the economy. Demonetisation, RERA and GST have all been landmark developments in the country. The fact that they have all been implemented within a short span of time, is bound to cause short-term upheaval till the economy and taxpayers get adjusted to it. However, in the long term, all these reforms will certainly make the industry more transparent, which will boost the overall confidence of investors in India.
(The writer is Associate Director, Valuation & Advisory Services, Colliers International India).