GST Implications On Real Estate

– Anil Pharande, Chairman – Pharande Spaces

The Goods and Services Tax (GST), is a kind of a comprehensive indirect tax on sale, manufacture and consumption of different kinds of goods and services throughout India, with all other Central and State taxes intended to be subsumed under it. If this happens, it has far-reaching implications, including on real estate.

Taxation and real estate industry

If we take a look at the real estate industry in India today, we find that there have been major tax changes in the last few years. However, these taxes are not uniform all over the country – different practices and regulations are followed in different states in India. It was the 46th Amendment to the Constitution that brought massive changes towards taxation in the real estate sector. Later in the following years, special powers were given to the State Government for implementing Value-Added Tax (VAT) on some specific kinds of transactions.

gst

For land, property and other kinds of work contracts, different kinds of taxes are levied by the State Government and the Central Government. The transactions are mainly categorized in three parts – value of services, value of goods and materials and value of land. VAT is applied by the State Government on the goods portion, while value of services is taxed by the Central Government. However, other than stamp duty, there is no clear tax on the transactions regarding value of land. This situation leads to confusion and can result in dual taxation. Compliance and implementation of such taxes also get difficult.

The real estate industry has justifiably been feeling jittery with such confusing tax implantations and calculations. For one real estate transaction, multiple taxes need to be paid and this has a negative effect on the industry. The industry’s demand to bring GST on board is primarily to get a clear and transparent taxation rule for the real estate sector in India.

Expected GST effects on the real estate industry in India

The implementation of GST can prove to be a significant step in reforming indirect taxation in India. Chances of double taxation would be diminished, as some of the Central and State Government taxes will be amalgamated into one tax. This will ease the process of taxation considerably, making its enforcement and administration easier and simpler.

Talking about the real estate industry in this context, there are many things which have to be known and understood. In the current situation, a builder or a real estate developer incurs various kinds of expenses during the construction phase of a project. Different kinds of taxes are involved with these expenses, such as VAT/CST, customs duties, service tax, excise duty and so on. Majority of these taxes are expenses that are included in the system. This is because they are not creditable to the developer or to the end-customer. These non-creditable expenses lead to tax inefficiency, which is not desirable.

One positive impact that might result from GST is doing away of restrictions on credit utilization. This will definitely help in strengthening the credit chain in the entire system. If property developers and builders can properly manage this aspect, they will see some profit.

It is expected that the proposed GST structure will have a progressive and streamlined approach. The tax compliance rules should not have any serious impact on real estate builders and developers. In present conditions, builders running projects in different states have to comply with State-specific VAT laws, as well as other kinds of service taxes. Bringing in GST will therefore not bring any additional compliance burden on real estate builders in the country.

Issues regarding GST which affect real estate builders

There are a few clarifications that might be sought for GST taxation by real estate developers. For instance, the definition of a real estate developer varies from one state to another in India. The composition scheme varies according to State, in which the VAT rates come between 1-5%. In some States, there are differences between the terms real estate contractors and real estate developers. It has to be understood what will the GST implications are if the terms have different meanings.

There might be some confusion regarding GST implementations on residential property, as well. In the present scenario, there is no service tax applicable on renting immovable property, particularly for residential purposes. But service tax and VAT is implemented on the construction work. The question that arises is if the proposed GST will offer differential tax for residential properties.

As of now, it does not look like completed residential projects will be affected by GST, as buyers into completed projects have already paid statutory charges such as stamp duty and registration charges on the transaction. The segments to watch on the GST front are under-construction flats and rental flats, which are expected to come under the ambit of GST. GST will apply to the materials that a developer procures for building a residential project, so there is a direct correlation to the overall cost of construction.

Much depends on what rate of GST will finally be confirmed. If it is more than the existing cumulative taxes currently in force, it means that the overall cost to consumers of buying an under-construction flat will increase along with the added cost of stamp duty and registration. At the same time, developers have to keep an eye on costing, as price competitiveness is very important in the current real estate market scenario.

About The Author:

Anil PharandeAnil Pharande is Chairman of Pharande Spaces, a leading construction and development firm that develops township properties in Western Pune. Pharande Promoters & Builders, the flagship company of Pharande Spaces and an ISO 9001-2000 certified company, is a pioneer in the PCMC area offering a diverse range of real estate products catering especially to the 42 sectors of Pradhikaran. The luxury township Puneville at Punavale in West Pune is among the company’s latest premium offerings. Woodsville in Moshi is another highly successful PCMC-based township by Pharande Spaces which is now in its 3rd phase.

PCMC – India’s Best-Planned Real Estate Market

Anil-Pharande

 

 

 

Anil Pharande, Chairman – Pharande Spaces

Planning In Real Estate

Planning is an inalienable component of real estate development. This is why buildings are engineered, not built randomly. While developing a project, this means that the builder follows a pre-determined design provided by an architect, who has based his or her design on proven engineering principles.

This planning ensures that the building’s structure has a prescribed foundation depth and distributes weight uniformly so that it can withstand internal and external stresses. The engineering aspect of project design also ensures that living units are proportionate and that the available space within them is optimally used.

estate-152518_640

In a residential complex, the planning aspect is extrapolated beyond individual buildings. The architect’s job is to engineer the project in such a manner than the buildings are distributed according to plan across the plot, and that open spaces, parking spaces, internal roads and common utilities are exactly where they are supposed to be. In larger townships, the planning aspect becomes even more involved because of the larger area.

Planned Cities

All these are expected factors when it comes to real estate projects. But when such detailed planning is applied to an entire city, its benefits are vastly magnified. Architects, engineers, town planners, government agencies and builders approach the development of the whole city as though it were one large integrated complex.

This takes a huge amount of planning, coordination, investment and effort, but the results are obviously worth it. This is how the Pimpri-Chinchwad Municipal Corporation came into being. This is what sets it apart from other cities and into the same bracket as other planned municipalities like Chandigarh.

Today, the PCMC is a model city which is the result of careful planning of economic, social and real estate development. Unlike in the other regions in Pune, PCMC’s town planning authorities have scrupulously shielded the city from the ad-hoc development that has paralyzed the rest of Pune. The futuristic thinking and high vigilance that has been employed in developing this region has resulted in an avant-garde satellite city which adds a whole new dimension to the Pune’s real estate market.

Planned Cities Which Began Well And Ended In Chaos

From the start, planning authorities of the PCMC were determined not to repeat the mistakes committed in other cities which were originally meant to be immaculately planned municipalities. They started off on the right note, but the planning aspect soon decayed and gave way to the kind of unregulated growth that has destroyed the urban fabric of most Indian cities today. Some of the examples of failed attempts to produce planned municipalities in India are:

  • West India: Navi Mumbai and the Kalyan-Dombivili and Virar-Vasai belts
  • North India: The Ghaziabad-Gurgaon-Faridabad-Greater Noida corridor
  • South India: Bangalore’s Devanhalli-Yelahanka and Chennai’s Siruseri-Sriperumbadur belts
  • East India: Kolkata’s Rajarhat-Batanagar-Kalyani belt.

In each of the above cases, what had begun as a regulated real estate development process soon turned to a commercial expansion. PCMC on the other hand, adopted a smarter blueprint from the start. No scope had been given to nearsighted development. PCMC was always meant to be the city of the future where residents could enjoy the benefits of 100% infrastructure-based, community-oriented real estate planning and development.

Real Estate Demand Drivers In PCMC

Demand for residential real estate in a successful satellite city is created when there is a right balance of infrastructure, a stress-free lifestyle and employment opportunities. Additionally, there has to be good connectivity to the parent city. In context of PCMC, these are:

  • Road and rail connectivity to Pune
  • Its highly-planned business and industrial zones create countless new jobs every year
  • Infrastructure is vastly superior when compared to Central Pune
  • Real estate development is strictly dictated by a pre-planned urbanization model that ensures high living standards for all

PCMC is a perfect example of how satellite cities can surpass the central city. Here, the retail, commercial and residential markets work together symbiotically to create a winning proposition for end users and investors alike. When compared to Pune, PCMC has a much higher availability of green spaces, superior social fabric and vastly better infrastructure. Thanks to better land availability, PCMC also provides the most opportunities for real estate developers to create large integrated townships, which have are nothing short of a blessing for Pune’s residents.

About The Author:

Anil Pharande is Chairman of Pharande Spaces, a leading construction and development firm that develops township properties in Western Pune. Pharande Promoters & Builders, the flagship company of Pharande Spaces and an ISO 9001-2000 certified company, is a pioneer in the PCMC area offering a diverse range of real estate products catering especially to the 42 sectors of Pradhikaran. The luxury township Puneville at Punavale in West Pune is among the company’s latest premium offerings.