The Goods & Services Tax (GST) is expected to have a massive impact on India’s economic prospects. It’s quite a revolutionary tax-related reform that has not been seen in our country for decades. GST will reportedly eliminate the cascading and conflicting taxation structures that have caused confusion for several industries in the past few decades. The positive effects of GST will become evident only after two to three years of its implementation. However, a single indirect tax, covering all goods and services will increase tax collection in the long run.
The tax will make it real easy for businesses and retailers to comply and moderate all taxation levels. Even though GST has already been announced, there is still a lot of confusion among experts as to which tax structure will be applicable for the real estate and construction industry. The tax rate hasn’t been decided yet, though expectation for the real estate industry is in the 12 percent bracket. However, GST rate is not the only rate to consider. Input tax credit facility for developers and abatement rules as applicable under the service tax regime if the effective tax incidence on real estate is lower or higher under GST.
However, the government has provided some clarity on the abatement rules for under-construction houses. Moreover, it has also spoken on input tax credit benefits for developers. The reader must know that affordable housing is currently exempt from service tax. The government is yet to clarify the applicability or continuing exemption under GST. In case of the commercial office real estate market, GST will likely be neutral overall. The existing service tax for commercial leases stands at 15 percent.
Thus, GST will likely remain at 12% slight savings and 18% slight increase, reports The Economic Times. In the residential real estate sector, sales are affected not only by tax rate but also a lot by sentiment. The trust deficit must also be taken into account, which is currently being addressed by RERA. If costs, however, rise under GST, the currently prevailing lower home loan rates may alleviate the impact to a certain extent. Buyers and investors are worried that the final cost of homes will increase even when the government levies GST at 12 percent.
Developers are also waiting for clarity though they know that it is in the best interest of their businesses to keep ticket sizes of homes range-bound. The developers are very much aware of the evolving market dynamics. Hence, it is logical to stay customer-centric and delivery-focused for creating a differentiated identity. If under GST, the government taxes residential leases, the rental housing market will be naturally impacted too. As residential leases are currently not taxed, GST’s impact on rental housing could bring in a slump over medium-term.
Rental yields in major cities may moderate if GST is levied on rental housing. Due to an increase in housing stock, rents may come down marginally. However, reduced rental yields may not independently impact sentiment because most investors in residential sector do not invest for rental yields, but for capital value appreciation.