Anuj Puri, Chairman – ANAROCK Property Consultants Pvt. Ltd.
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 increasing 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 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.
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).
Dear Mr. Puri,
Quite an informative piece, thank you. In your opinion, how do you think the GST is going to impact the industrial/logistics sector?
GST will lead to the emergence of more than a dozen new warehousing hubs apart from an increase in warehousing supply within the existing eight hubs. This bodes well for eCommerce players as they will be able to service many more locations across the country. As transit time taken during state border crossings and the paperwork involved will reduce, it will immensely benefit logistics players. These cost savings could even get passed onto the consumers.
Under the new tax structure, the focus would shift from saving tax by having smaller warehouses, to improving overall efficiency. Merging of smaller warehouses will lead to higher efficiency in supply chains and the former would become more productive and logical locations. Automation of these assets will be seen, which will give excellent cost benefits to the landlords/ operators. As the rents charged by organised warehouses will go down, the price advantage that unorganised warehouses presently enjoy will shrink.
Demand for organised warehouses will go up and resultantly, more developers could get into the business. At lower investment compared to other asset classes, the returns on investment in warehousing are more attractive. Apart from the obvious benefits, all these factors are expected to lead to an increased interest of private equity players in the sector and India moving further up in the LPI 2018 rankings. Both logistics and warehousing look all set for a long, new phase of fast growth.