1. GST, RERA to increase prices of residential property: Colliers Research

GST, RERA to increase prices of residential property: Colliers Research

The implementation of the Goods and Services Tax will increase final product prices of commercial and residential property, even though it positively enhances India’s attraction as an investment destination.

By: | Published: July 3, 2017 4:47 PM
GST GST will markedly reduce the total costs of the logistics industry due to warehouse optimisation and lower inventory cost.

Noida: With the implementation of Goods & Services Tax (GST) from 1 July, 2017, numerous sectors in the Indian market are to be affected and the reform is likely to further enhance India’s attraction as an investment destination. Generally, real estate has to deal with a multiplicity of taxes applicable at different points of the property cycle, including indirect taxes such as service tax, excise duty and value added tax which apply to the procurement of goods and services during construction as well as direct taxes, such as capital gains tax and wealth tax. Stamp duty is also payable on sales of immovable property.

The implementation of the long-awaited GST will bring all indirect taxes under one unified tax structure; leading to a scenario where there will only remain direct taxes, stamp duty and GST for all property-related transactions. This will definitely bring more clarity in the transactions and make the system more efficient, says a report by Colliers Research.

According to it, the industrial property and warehousing segment will be the primary beneficiary of adoption of GST system in the short term as the reform should be increasing its operating efficiency. Restructuring the tax system will catalyse the rise of warehousing market by eliminating multilayered tax structure and state borders, creating a common market place across the country and reduce the transport time as we do away with octroi checkpoints. The decision to establish a warehouse will no longer be based on tax arbitrage, but on achieving the most optimal logistics solution. Logistics companies will also look to establish large consolidated warehouses located on strategic transit corridors. Thereby, the market is likely to witness development of a hub and spoke system of warehousing, the hubs being on transit corridors and the spokes on feeder lines.

“The implementation of the Goods and Services Tax (GST) will increase final product prices of commercial and residential products, even though it positively enhances India’s attraction as an investment destination. The positive impact will be through the demonstration of the government’s intent for delivering on its commitments of reform aimed at encouraging greater transparency and ease of operation across all sectors. The industrial property and warehousing segment will be the primary beneficiary of adoption of the GST system as operating efficiency is expected to increase. However, during the early stages of implementation, we expect costs to increase due to the negative impact on the supply chain through-put due to teething issues,” said Joe Verghese, Managing Director, Colliers International India

On the other hand, commercial leasing transactions, which constitutes a major portion of overall commercial property business in India, will see an immediate increase of 3% in occupier commercial leasing costs. The biggest impact will the double whammy of RERA and GST at the same time on the residential sector. Both of this would seriously affect supply and lead to further increase in prices.

As per Colliers Research, GST will markedly reduce the total costs of the logistics industry due to warehouse optimisation and lower inventory cost. As a consequence, the cost of products is likely to come down and the country will become one truly large market. Further, recent government initiatives such as “Make in India” and 100% FDI in the e-commerce sector should also boost the manufacturing and warehousing sector. Various global players like Amazon, e-Bay, Flipkart etc. have already entered the Indian market and started occupying large warehouse spaces in order to gain a share of the e-commerce business.

Coherent with the recently-announced affordable ‘Housing for All Mission’ (Urban) vision, pure labour contracts for construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works have been excluded for affordable housing projects. Though it looks like that, there will be a neutral impact from cost perspective, the recent revision on tax rate on construction to 18 percent for building for sale to a buyer, wholly or partly, excluding the value of land might lead to increase in prices of on-going residential projects.

In such a case, additional cost burden is probable to be passed on to the end-users. The sale of completed houses in the secondary market should not be impacted by GST, as these transactions will not fall under the ambit of the GST and stamp duty will be payable on these transactions. Though the impact of tax on construction materials is not likely to be intense, reduction in transportation cost will lessen the overall cost burden to an extent. The work contracts will attract around 18% and most of the construction material is under 18 and 28 percent slab, the availability of input tax credit should neutralise the overall impact on cost of construction. However, the input tax credit is limited to 18% and no overflow is allowed while claiming the credits.

Commercial leasing constitutes a major portion of overall commercial property business in India. Currently, leasing of commercial property qualifies as a service, thus is subject to service tax. The service tax is applicable at the rate of 15 percent which will be replaced by 18 percent GST, thus increasing the cost for occupiers by around 3 percent.

Colliers Research further believes that a great deal of impact will depend on the proper implementation and an appropriate system of claiming tax credits. With the Real Estate Development and Regulation Act (RERA) also under implementation, developers may need to focus much more on streamlining their processes.

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