The real estate industry has significant forward and backward linkages with other industries that are predominantly in the informal sector. With the unified Goods & Services Tax (GST) regime, the stakeholders are now witnessing the benefits of integration in the supply chain and the consumer will be the ultimate beneficiary of this landmark reform.
Business has benefited with a multitude of indirect taxes on construction inputs being streamlined into one while house buyers have benefited due to the uniformity brought about by GST being levied at a standard rate and on a consistent basis of calculation across the country. In the past, across cities, the variability in the rate of Value Added Tax and the basis of calculation created an additional level of variability factor in property price in different states. The same is uniform across markets now and the prospective consumer has one lesser complexity to deal with.
On ground, the impact of cost-benefit varies across markets and product categories. Considering that real estate as a product involves large number of inputs and is delivered over a four to six-year period to the consumer, the verdict on the exact impact of GST will take some time.
Impact on ready-to-move and under construction properties
In case of a ready possession property, there is no incidence of GST and has the required clarity from consumer point of view.
However, in case of under-construction property, there are primarily two customer segments; one who bought an under-construction property before the implementation of GST and the second are buyers who have bought an under-construction property post the implementation of GST. For the first set of consumers, the incidence of GST will be very particular to the specific case dependent on the stage of construction and the value of land in the house price. For the second set of consumers, the rate of GST is clear at 12% (after abatement for land).
Impact on house prices
In terms of the GST impact on house prices, house buyers particularly in the low to mid-income housing segment have witnessed a cost reduction on account of either or both factors - the benefits of input tax credit and lower GST rate of 8%. However, in case of premium housing, we have witnessed a moderate upward pressure due to unabsorbed input tax credit as the land value in such cases is much higher than the provided standard abatement for land value to the tune of one-third of the value of the house. However, considering the subdued residential market scenario in the country, in almost all cases, developers have absorbed any upward cost pressure because of GST, which augurs well for the consumers.
Impact on warehousing
Another prominent segment of real estate that has been significantly influenced by GST is the logistics and warehousing segment. Warehousing activities carried out for the sole purpose of avoiding tax have become redundant with the introduction of GST. Travel time for inter-state transportation has also come down significantly owing to the elimination of state entry barriers. Trucks are now able to cover longer distances every day, with an improved turnaround time, implying that transporters can carry out their business with smaller fleets.
GST has also reduced the costs incurred on taxes and state permits. Both these savings (time and cost) are nullifying the need for multiple warehouses in different geographies. Faster movement of goods will enable reduced inventory holding levels. Reduced inventory levels directly impact the requirement for warehousing space and facilitate the growth of fewer, larger warehouses that allow companies to leverage enhanced economies of scale. Accordingly, companies have begun warehouse consolidation and benefit from reduced inventory carrying costs. Not ignoring the fact that the level of consolidation in warehousing will vary across industries.
Considering that we have spent just a year in this new regime and the teething problems are being addressed on a regular basis, we are optimistic about the potential of this reform, which will eventually have a transformatory impact on the country’s property market.
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