If there’s one certainty in Modi’s India, it’s that government policy will be bold, and few policies were quite as bold as the rollout of the Goods and Services Tax midway through 2017. Billed as ‘One Nation, One Market, One Tax,’ GST is nothing less than a comprehensive overhaul of the country’s entire tax structure, designed to streamline the economy and make India more appealing to an ever-increasing flow of international investment.
GST leaves no sector of the economy untouched, and real estate is no exception. The new tax regime will create a smoother, more efficient property market, one where builders are able to source their supply on a national level and buyers have greater transparency with respect to taxes. As Indian real estate continues to evolve in 2018, GST will provide additional efficiencies to the industry.
GST In a Nutshell
Unlike most tax legislation, GST is quite easy to understand: a common indirect tax levied on the supply of almost all goods and services. GST replaces a bloated and inefficient legacy tax system, a necessary step in modernizing the nation’s economy and make India one cohesive market. By fixing numerous inefficiencies in the country’s tax structure, GST is expected to boost the country’s GDP growth for years to come.
GST provides a number of improvements over India’s previous tax regime:
- Lower Cost: The previous setup did not reveal the full tax costs to consumers, as invoices often did not show taxes related to raw material and various other services. With GST, consumers pay a single tax, which incorporates all the upstream taxes in one final tax.
- Simplicity: Things such as service tax, luxury tax, central excise duty, additional excise duty, octroi and entry tax, entertainment tax, lottery, and betting and gambling taxes have all been subsumed into GST’s four-tier tax plan. This reduces tax filings and bureaucratic delays.
- Transparency: Under a single and transparent tax levy, consumers won’t have to worry about paying hidden taxes during transactions.
A New Day for Developers
While developers were skeptical about GST during the initial rollout, such skepticism is unwarranted; most developers will benefit from the new regime in both the short and long term. On a fundamental level, GST decreases the tax burden for any developer. Before GST, developers had multiple levels of taxes levied throughout their supply chain, such as service tax, entry taxes, VAT and central excise duty, and not all of them were offset by the taxes paid by buyers. All of these have been replaced by GST, which levies a single tax on the construction cost of properties intended for sale.
While this aggregation of different taxes is a welcome development, its impact is dwarfed by the introduction of more comprehensive input tax credits and the creation of a common market between states. Both developments will lead to a much more efficient supply chain in an industry that depends on a multilayered and complex supply network.
Supply chains in real estate are complicated. For example, In order to source a window for an apartment complex, the raw materials will pass through at least five different subcontractors before the glass gets installed on the twentieth floor. Under the previous regime, a variety of taxes would be levied at each stage without accounting for taxation at later stages, meaning the final price would include multiple taxes, including taxes on taxes, without full input credits on all those taxes. With GST, due to the ability to get full input tax credits, this window would only be taxed once, as vendors can claim credit for tax at each stage.
The common market similarly streamlines the supply chain, as builders will now be able to source materials from the best supplier, instead of the best supplier in their state. As suppliers had to pay a tax and their vehicles were often delayed whenever they crossed the border, the most affordable supplier pre-tax would often be more expensive after taxes had been taken into account. Bangalore and its suburbs, for example, are very close to the Tamil Nadu-Karnataka border, and someone building in Electronic City, right by the border, may source supplies from Tumkur, 100 km away, even though Hosur, only 20 km away but across state lines, could provide the same supplies at lower or equal cost. Now, developers can choose from a truly national market, increasing the industry’s (and the country’s) overall efficiency.
In truth, developers have very little to complain about with GST. While prices may not drop substantially, the real estate market post-reform will be a much leaner, more efficient sector, with streamlined logistics, higher-quality construction, and more competition.
Benefits for Homebuyers
Homebuyers, too, have reason to be pleased by GST.
Properties that are under construction will now be taxed at 12% of the total cost of the property. Although this sounds higher than the previous regime where service tax and VAT was only paid on the construction cost, the total tax burden on buyers should come down because the tax efficiencies for the developer will result in lower overall tax cost for the project, which should be passed on to buyers in a competitive market..
If you are a tenant, you may also be better off under certain circumstances. Rents paid on residential property will not incur you any tax under the GST law, which is similar to the position prior to GST. However, if you are using the premises for industrial or commercial purposes, you will have to pay 18% GST, but can offset it against any GST you may collect from your customers.
The Goods & Service Tax Act is just one of the many policies implemented by the government to set up the economy for higher growth in the long run. Real estate’s contributions to the economy’s GDP is expected to increase to 13% by 2028, creating a tremendous amount of wealth along the way. Booming consumer demand, increased tourism, and rapid urbanization in India are powerful drivers of growth that will undoubtedly attract new investors to the country. As the industry gazes towards 2018 and beyond, the future looks increasingly bright.