Indian legislators, on 3 August 2017, approved the most debated tax reform – Goods and Services Tax (GST). Economists predicted the consequent simplification of the Indian tax system and its potential to stimulate overall economic growth. One year has passed and it’s the time to evaluate what GST brought for the real estate sector in the last one year.
The Indian realty sector, that was dealing with a multiplicity of taxes applicable at different points of the property cycle earlier, now has to deal with less number of taxes. The implementation of GST brought all indirect taxes under one unified tax structure, thus leading to a scenario where there only remains GST for all property-related transactions. However, direct taxes such as capital gains tax and wealth tax remained the same, and one still needs to pay stamp duty and registration cost on the purchase of immovable property.
The under-construction and ready-to-move-in properties have different tax treatment under GST. There is no GST payable on the completed properties as the sale of a completed building is an activity or consideration, which is neither a supply of goods nor a supply of services. The rules define completed properties as projects that have got the completion certificates. In the last one year, there was an inclination towards the completed projects, but the non-applicability of GST was not the only reason for the apparent preference for completed projects. Huge availability of ready-to-move-in properties, delay in completion of under-construction projects, new timelines given by the developers for under-construction projects after imposition of RERA rules are more practical reason for the increase in sales of ready-to-move-in projects.
Generally, 18% GST is applicable on two third of the cost of the under-construction property. One-third of the cost has been considered as the deemed value of land. Thus, GST payable on the purchase of under-construction properties (commercial/residential) from a builder attracts 12% GST with full input tax credit (ITC) subject to no refund in case of overflow of ITC. The developers are supposed to pass on the full benefit of ITC to the home buyers. In Jan 2018, the government further reduced the GST for property under the Credit-Linked Subsidy Scheme (CLSS) to 12% where effective rate comes at 8% after deducting one-third of the amount charged for the house towards the cost of land.
The sales of under-construction projects have still not picked up to the level when projects used to get sold like hot cakes. However, there was a clear preference for trusted developers and RERA-registered projects. Finally, the home buyers have started looking at the track records of developers and going with the developers delivered rationally in the past. Again, the role of GST is limited so far as half of the year has passed in clarification about the applicability of GST on such properties and buyers are more concerned about delivery timelines and quality of the completed product. In the coming months, it will be interesting to see how many developers will pass on the full benefit of the ITC to the consumers.
Meanwhile, apart from residential and commercial properties, another asset class that has emerged as a clear winner in last one year, is logistic and warehousing sector. The logistics and warehousing sector has undergone a revolutionary change recently due to the roll-out of the Goods and Services Tax (GST) and other favourable policy regimes such as Make in India, National Manufacturing Policy (NMP), infrastructure status and 100% Foreign Direct Investment (FDI) in e-tailing marketplace. Several international players such as FedEx, Kintesu World Express, DHL, and TNT have already entered the logistic market, through mergers and acquisitions and joint ventures with Indian logistics companies. Last year, Canada Pension Plan Investment Board’s (CPPIB) acquired a significant stake in IndoSpace, for ~USD500 million (INR3,252 lakh), making it the most significant industrial and logistics deal of 2017. Recently, state-owned Singapore-based investment firm Temasek and Ascendas-Singbridge announced their plans to invest INR2,000 crore (USD307 million) across critical logistics and warehousing markets of India. Companies’ such as Amazon, Delhivery, 4tigo Network Logistics, and DHL have secured the infusion of funds on the warehousing activities and have announced plans to expand their warehouses shortly. Rapid growth in e-commerce, retail, fast moving consumer goods (FMCG), auto and auto ancillary, chemical and pharmaceutical industries will ensure growth of the warehousing sector to the next level.
To conclude, we have entered into an exciting era where these policy reforms such as the GST, RERA, and easing of FDI norms have started impacting investment scenario positively by bringing much-needed transparency, compliance and corporate governance into the system. The real estate is likely to flourish well in the coming years, with office and residential to further strengthen and new sectors such as logistics and warehousing sector to witness increased traction.
(By Surabhi Arora, Senior Associate Director, Research, Colliers International India)