ET CONTRIBUTORS| Updated: May 09, 2017,
10.40 AM IST
By Anuj Puri, Chairman, JLLR (JLL Residential)
The Goods and Services Tax (GST) is beyond doubt
the most revolutionary tax-related reform to be seen in India in several
decades, since it will eliminate the conflicting and cascading taxation
structures which have confounded several industries over the past few decades.
It will most certainly have a profound effect on India's economic prospects.
A single indirect tax which covers all goods and services
will, in the long run, increase tax collection by making it easier for
retailers and several other businesses to comply and also moderate overall
taxation levels. That said, it should be remembered that the favourable effects
of this new taxation regime will become evident only within 2-3 years of its
implementation.
Though the goods and services tax (GST) tax
structure has been announced, there is still a lot of conjecture about which
tax rate will be applicable to the real estate and construction industry.
The tax rate is not decided yet and it would be
premature to comment on it at this point. The expectations are for real estate
to be in the 12% bracket. However, the GST rate is not the only important
factor. The abatement rules as applicable under the service tax regime and the
input tax credit facility for developers will determine if the effective tax
incidence on real estate is lower or higher under GST.
Effectively, the composition scheme allowing for
abatement against cost of land to the extent of 75% of the house cost for
residential units priced under INR 1 crores and less than 2000 sq. ft. makes
the effective rate at 3.75%. In other cases, the abatement goes down to 70%,
making the effective rate at 4%. This will go a long way in determining whether
GST is tax neutral or tax adverse for
real estate.
The Government has offered some clarity on the
abatement rules for under-construction houses and input tax credit benefits for
developers.
Impact on Residential Real Estate:
If we look at the residential property sector,
sales are not just impacted by tax rates but also by sentiment, and also on account
of the trust deficit which the Real Estate Regulation & Development Act -
or RERA -now seeks to address. That said, if costs do go higher under GST, the
lower prevailing current home loan rates could assuage the impact to some
extent.
Buyers and investors as well as developers are
understandably worried that the final ticket size of homes will increase even
if the Government levies GST at 12%, when compared to the existing service tax
rates. Developers are still awaiting further clarity on this, but they know
that it is in the interest of their business to keep ticket sizes range-bound.
Evolving market dynamics have already brought about a change in the manner in
which developers work. Staying customer-centric and delivery-focused to create
a differentiated identity will be the most logical and likely method for them
to adopt.
Impact on Rental Housing
Other doubts pertain to the rental housing
market, which would naturally be impacted if the Government were to tax
residential leases under GST. The common apprehension is that if this were to
happen, the rental housing segment may see a huge slump over the medium-term,
since residential leases are currently not taxed at all.
Here, it is pertinent to note that residential
leasing is an inherent demand which will not evaporate merely by higher taxes.
Certainly, we may be looking at a rental stagnation or marginal decline as the
market readjusts to the new dynamics which GST will infuse. However, rental
housing demand is sticky and end-user-driven in nature, so we are definitely
not looking at a major slump in this segment because of GST even if it does tax
residential leases.
That said, rental yields in major cities could
certainly moderate if GST is levied on rental housing. In India, rental yields
in housing are quite modest at around 2-4% on an average. Rents may either hold
steady or decline marginally due to increase in housing stock. However, it is
also true that most investors in the residential sector do not invest for
rental yields but rather for the capital value appreciation, so reduced rental
yields would not independently impact sentiment.
That said, rental yields in major cities could
certainly moderate if GST is levied on rental housing. In India, rental yields
in housing are quite modest at around 2-4% on an average. Rents may either hold
steady or decline marginally due to increase in housing stock. However, it is
also true that most investors in the residential sector do not invest for
rental yields but rather for the capital value appreciation, so reduced rental
yields would not independently impact sentiment.
Impact on Commercial Real Estate
When it comes to GST's impact on the commercial
office real estate market - with the existing service tax for commercial leases
at 15%, GST would be likely neutral overall (at 12% slight savings, and at 18%
slight increase).
Impact on Affordable Housing
Affordable housing is currently exempt from
service tax. It is likely that the government may come out with a clarification
regarding the applicability or continuing exemption under the GST.
(Disclaimer: The opinions expressed in this article are that of
the writer. The facts and opinions expressed here do not reflect the views of
economictimes.com)
Read more at:
No comments:
Post a Comment