Is GST a Curse or a Boon on the Realty Industry?

25 Nov 2017

The realty industry is amongst one of the strongest in the country, an industry which didn’t go down like other industries did even during the recession. Even demonetization wasn’t able to grind the industry to a halt, unlike many of the unorganized sectors.

The real estate industry is a pivotal sector in the Indian economy, generating employment for millions of Indians, and ranks second after the agricultural industry for job creation. The real importance of the realty industry can be understood when you see its 5-6% GDP contribution towards the country’s economy, aside from creating demand from more than 250 ancillary industries.

However, real estate has always been bogged down with multiplicity of taxes on materials as well as legal transactions including the service taxes, VAT, as well as stamp duty, etc. So with the implementation of the GST, the supply chain mechanism is getting completely revamped with invoices being stored in clouds. The multitude of taxes has also been streamlined with only four taxes being applicable currently – 5%, 12%, 18% and 28%. Though the Goods and Services Tax is touted to go easy on the pocket, it seems unlikely as the middle and luxury segments are the ones targeted by the GST- and that’s where the sales are.

The aim of GST is to bring transparency in all transactions in the real estate industry which till now has been inundated with numerous anomalies and discrepancies. The introduction of the single tax system is expected to remove the multiple taxes that inflate the cost of goods; the windfall of these benefits is supposed to be passed onto the consumers, but that remains to be seen as real estate pricing is driven by market forces. As it is, the realty industry enjoys tax breaks in the SEZ zones, with the same rule expected to be carried forward under GST too.

For about a year till things fall in place, sale of land and buildings are out of the ambit of GST. However, construction under the GST will see some benefit due to the rates declared for essentials like bricks, cement and iron. Tax under GST for cement is 28% while earlier it was 23-24%, however other taxes charged over the earlier rate would be absorbed under the GST. Likewise, current tax rates for iron rods are 18% while earlier it was about 19.5%. Similarly, bricks used in construction under GST rates, stand at 28% while earlier it was 25-26%. But the logistics and transportation charges of these commodities are expected to come down and get subsumed under the GST laws, leading to a no-loss situation.

In conclusion, impact of GST on realty sector is expected to be neutral, even when GST rates are higher than earlier rates. However, some benefits are expected due to greater transparency and accountability.