How RERA, GST will impact real estate sector and home buyers

By: | Updated: September 3, 2016 1:50 PM

Two of the most significant regulations – (1) Real Estate Regulatory Act (RERA) and (2) Passing of Goods and Services Tax(GST) - are preparing for some serious changes for the sector. Both offer different ease to the sector while RERA aims to bring in a regulated system for sector’s growth, GST aims at easing the overall business and making it hassle-free, be it for developer or for a consumer.

RERA – Undoubtedly, it has been the biggest reform, which has come in real estate sector in a while. The announcement of this law has seen mixed reviews from developers as well as home-buyer. (Reuters)RERA – Undoubtedly, it has been the biggest reform, which has come in real estate sector in a while. The announcement of this law has seen mixed reviews from developers as well as home-buyer. (Reuters)

“The only thing that is constant is the Change” is a very famous and well-known saying and currently every stakeholder of the real estate sector will agree with it in toto. The sector witnessed significant regulatory changes in the recent past that are poised to define the future of the sector.

Prima facie, it is evident that the sector will be heading towards a more transparent, competitive, value offering, hassle-free and definitely consumer-focused. All these present a very promising picture but execution is what will define the actual course of these changes.

Two of the most significant regulations – (1) Real Estate Regulatory Act (RERA) and (2) Passing of Goods and Services Tax(GST) – are preparing for some serious changes for the sector. Both offer different ease to the sector while RERA aims to bring in a regulated system for sector’s growth, GST aims at easing the overall business and making it hassle-free, be it for developer or for a consumer.

RERA – Undoubtedly, it has been the biggest reform, which has come in real estate sector in a while. The announcement of this law has seen mixed reviews from developers as well as home-buyer. The act has very well encapsulated the features to safeguard home-buyers interest completely but in doing so it has proposed certain changes that are likely to impose financial challenges on the developer which eventually might be burdened on a home-buyer itself.

For instance, RERA prescribes that every project be registered with the Authority disclosing all relevant information pertaining to the property such as details of promoters, sanction plans, number of units with carpet area, etc. This is to ensure that developers have all the necessary sanctions, and thereby do not commit beyond their reach and are accountable to what they have committed during the actual sale. This is to safeguard the capital of the consumer and ensure that the project does not get delayed. However, this also means that a developer cannot have pre launches conducted which was till now the ideal route to raise much needed capital for the project. As a result a developer would now need to borrow capital at higher cost to get the project off the ground, thereby increasing the cost for consumer.

Similarly, Commitment on Carpet Area states that a home-buyer has to pay only for the actual useable area and not as per super-built up area currently being followed. Again this will clear the air with respect to what a home-buyer is paying for and make it transparent. However, super-built up area will have to be developed and now since it cannot be imposed on the consumer, it will be borne by developer which will eventually be loaded on the carpet area cost itself, making it expensive.

Maintenance of Escrow account with 70% sales proceed will make certain that unscrupulous players do not divert funds and finish the project on time. However, this will take away the opportunity to invest the idle funds and thus hamper the growth of business as cost of borrowed capital for the sector is currently very high.

One thing is clear; government’s aim with introduction of the act is to make sure that the projects are delivered on time. But it has missed addressing one major hurdle in the path of this objective- delay in sanctions and plan approvals. All delays are not from developer’s end. Sanctioning and approving bodies play a major role and thus need to be brought under its ambit if government genuinely wishes to achieve its aim. The state government has the opportunity to amend the act. If the states look at developers in the same priority as customers, the act would be a success.

GST – This is solely aimed at providing ease of doing business for developers and making home buying a hassle-free exercise for a home-buyer too. For a developer, this is going to be beneficial as it would reduce the burden of dual tax on products moving between states. It would offer an easier approach to tax compliance and would eventually push every business to pay tax and not evade the tax. It would also create a level playing field for all stakeholders as it is a unified tax regime.

For consumers, the benefit would be seen if the proposed GST is lower than the current tax structure. However, it would eventually reduce cost for developers which would be offered to consumers thereby will impact the cost of the property.

Overall the scenario is looking good on the medium to long run for businesses and consumers. But on the short run it would mean a lot of transitional difficulties for businesses. It would spell doom for lot of developers and the market would see lot more consolidation. Unscrupulous players will have no way to thrive and a consolidated and strong sector is what one can expect in 5-10 years from now; a sector that will be clean and respectable for its approach and business as a whole.

The author is executive director, Unishire

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