The Goods and Service Tax (GST) is the most radical reform that is set to change the economic prospects of India. This new rule of taxation is surely a welcome change. GST is built into the value added structure that would eliminate the cascading effect of taxes and is expected to increase tax collection making it easier for retailers and other businesses and also reduce overall taxation levels. However, the result will be evident only after two – three years after GST is implemented. The One India, One Tax rule is all set to change the multiple taxation and ease a citizen’s investment in the real estate industry.
GST affects the real estate industry too and the existing top warehousing hubs are: Delhi NCR, Mumbai, Pune, Bengaluru, Chennai, Hyderabad, Kolkata and Ahmedabad. These eight city hubs together have a cumulative 97 mnsqft in 2015 and this is expected to grow to around 116 mnsqft by the end of 2016. GST will result in the emergence of new hubs in Belgaum, Bhubaneshwar, Coimbatore, Goa, Guwhati, Indore, Jaipur, Kolhapur, Lucknow, Kanpur, Ludhiana, Nagpur, Patna, Raipur, Ranchi, Vapi and Vijayawada. The retail industry and residential property buyer’s gain and GST will give a big leap to manufacturing, warehousing and logistics sectors. There are however, implications beyond these sectors too.
The benefits of GST to different sectors:
- Cost reduction from manufacturers
- Cost reduction for logistics players
- Hub-and-spoke system
- Merger of smaller warehouses and development of new technologies
- Increase in organized warehousing sector
- Reduction in transit time
The introduction of GST will reduce transit time taken for border crossings and paper work. The retail industry too will see an indirect impact due to increased efficiencies in the supply chain. The cost to customer, which is linked to taxation, will go down as the multiplicity of taxes will no longer apply.
Currently, in the case of buying an under-construction flat, a home buyer needs to pay both Service Tax (4.5%) and VAT (1% in Maharashtra, varies from state to state). Additional indirect taxes are paid by the developer during procurement, which get built into the cost of an apartment. Stamp Duty (5% in Maharashtra, varies from state to state) which is payable on property transfers, is not going to be subsumed into the GST. The direct impact of GST on real estate, in terms of tax outflow for developers and consumers, will depend on whether the final GST rate is more or less than the taxes paid currently. The compliance costs will go down too.
It is important to note that the real estate sector shares positive symbiotic relationships with more than 250 other sectors such as cement, steel, IT, BFSI, etc. Due to this, the benefits or drawbacks of GST on each sector will also have an indirect impact on real estate and vice versa. At this point in time, we may see very limited tangible benefits on the real estate industry but the cascading effects will definitely be higher.