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Indian Real Estate Sector Vs GST

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.

Impact on Residential Real Estate:

Under-construction real estate is covered under GST through works contract and classified as a service. The GST tax rate for under-construction real estate has been set at 12%. Also, it has been clarified that input tax credit will be available for developers to take advantage of and pass on the benefit to the buyers under the anti-profiteering clause of GST.

Impact on developers:

Tax is now 12% with full input tax credit available to developers on construction materials. The final bill is likely to be the same or marginally higher, varying across states as clarity on abatement rules has still not been provided. Some change in terms of changing market dynamics has already brought about a change in developers’ workings. 

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.

Rental yields in major cities are already at around 2-4% on average. Being already low, we would expect rents to hold or maybe decline due to an increase in housing stock. Most investors in the residential sector do not invest for rental yields but rather for the capital value appreciation, so even a drop in yields would not independently impact sentiment. ST is not applicable on rental housing.

Impact on Commercial Real Estate:

Under-construction real estate for sale purposes will attract GST at 12%. This likely to be tax-neutral to slightly negative depending upon states’ prevalent service tax and VAT rules.  For commercial leases, the GST does not talk expressly about this service and hence it is covered under 18% tax rate with full input tax credit and this should turn out to be neutral for this sector. 

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 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.

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