With the announcement of the Goods and Services Tax (GST) and the implementation of GST for real estate, 2017 is bound to have a brighter horizon for the sector. Let’s understand the impact of GST on real estate. 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. Builders and tax consultants are of the opinion that the implementation of GST for real estate will help reduce the cost of ownership for property buyers, especially if the GST rate is lower than all the collated tax rates; additionally GST for real estate will definitely help bring about transparency in the buying process. Developers hope that affordable rates will most likely result in a surge in sales, which in turn will help payoff project investors.
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 increase in 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 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).
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.