The new financial year is finally upon us. I cannot recall this country’s citizens having waited with such eagerness in recent times to find out how the new taxation regime will affect their property investments. The other much awaited, path-breaking tax reform has been that of the Goods and Services Tax (GST). Overall, the Union Budget 2018 announcements have been positive for the property market, with minor ambiguities thrown in. The Government’s intent has largely been to encourage real estate transactions and make investments in the realty sector easier for home buyers. Marginal tax benefits have also been granted to construction firms with unsold units in completed projects.
GST: Most significant tax reform in recent times
Come July 2017, we should see one of the biggest indirect tax reforms India has ever seen. Over the years, GST has faced multiple challenges regarding its structure, its tax bracket and intervention from state governments fearing loss of revenue. Should all go well in the intervening months, consumers like us will carry a reduced tax burden of the double taxation on daily consumables. Indian products will also likely become more competitive in the global markets; and the ease of doing business in the country, moreover, will improve—attracting greater overseas investment inflows.
Barely a month ago, the Government announced the establishment of working groups for sectors such as banking, IT/ITeS, and telecom, among others, to help chalk out a road map for these sectors. I believe these industry-specific working groups will soon be stretched to include the real estate sector as well. The realty segment to benefit most from this move, however, will be logistics and warehousing, followed distantly by the retail segment—particularly fast moving consumer goods (FMCG), and food and beverages (F&B) retailers.
Despite expectations of an overall positive impact of GST on the warehousing segment, however, the model GST law has some grey areas for the construction and real estate sector as a whole. The final tax rate for real estate continues to be a primary issue. Many believe a lower rate should be granted to the sector, ensuring that there is no duplication of tax. Service tax exemptions for affordable housing, moreover, are currently not part of the model, which should also be provided to promote ‘Housing for All’ by 2022. In addition, the model law contains a negative list of goods / services on which Income Tax Credit (ITC) is not available. Such ambiguity may have a ripple effect on the tax cost of construction firms, leading to rising property prices. Should that happen, the Government’s intent of driving home buyer demand and boosting property investments will take a back seat.
As our taxation system prepares for this latest overhaul, GST will be the game changer that will convert India into a unified tax market—easing compliance challenges as well as those for doing business in the country.