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.

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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.

How Infrastructure Drives Real Estate Demand

– Anil Pharande, Chairman – Pharande Spaces

All property investors are familiar with the phrase ‘market drivers’, which has become one of the most utilized terms in real estate investment. What exactly are market drivers? They can be explained as advancements within a region which boost the overall worth of the location, and the desirability associated with residing there. It is a well-established fact that the infrastructure of an area is a key criterion for home buyers, and therefore property investors.

Infrastructure has numerous types. For instance, roads are considered key infrastructure, as they enhance the connectivity of the area. There is also civic infrastructure, which involves the availability of public services in the region. In India, the primary aspects covered under civic infrastructure are reliable water and electricity supply, without which an area falls flat as a residential location and therefore as a real estate investment destination.

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Then there is the factor of social infrastructure, which accounts for the liveability of the area. At the most basic level, civic infrastructure will include public transport and shopping outlets, but educational institutions and hospitals are also important. People expect to have colleges, schools and healthcare facilities close to where they live. Therefore, the level of saturation of social infrastructure will play a big role in the overall value of the location as a residential and investment destination.

The global standard for urbanization which is evident in most developed countries is that all or most of infrastructure required to make an area livable and desirable as a real estate destination are set up prior to or opening it up for large-scale real estate development. This is because efforts to put the necessary infrastructure in place retrospectively results in inconvenience to the existing population because of decreased public mobility during construction of such projects.

Retrospective construction of infrastructure projects also pollutes the environment during the actual construction process, and this is nothing but bad news in an area which is already inhabited.

Creating the infrastructure which is required to make a location liveable and also supportive to various economic functions can be compared to creating vast green cover in an area . In both instances, there is a primary requirement of adequate space. Another vital factor for successful infrastructure creation is time. In the case of trees, the root systems must be given adequate time to penetrate deep enough to provide anchorage as well as access to deep-lying groundwater. Similarly, infrastructure must be given enough time to be deployed, become functional and start servicing the area properly. Without space and time, both forestation and infrastructure creation become futile exercises.

infrastructure

If we take the cases of Pune and the adjoining Pimpri-Chinchwad Municipal Corporation (PCMC), we see a vast difference in successful infrastructure deployment. In Pune, the PMC has been unsuccessfully trying to provide retrospective infrastructure support to its massively congested and largely dysfunctional city areas.

Almost every new infrastructure project in Pune is hotly contested by local political parties and becomes road blocked by bureaucratic red tape. One of the reasons is that these projects affect already populated areas, which represent vote banks. The result is that most of these projects take ages to be built, and many are eventually shelved altogether.

The advantage that the PCMC has enjoyed is that it follows a proactive rather than reactive approach to infrastructure creation. In other words, massive Greenfield areas are taken up by the town planning authorities for infrastructure creation, and only then  opened up for further development by private builders. This has resulted in extremely viable, plug-and-play residential neighbourhoods and commercial districts which start delivering the goods from day one.

This proactive approach to infrastructure has earned PCMC the distinction of being one of India’s most sought-after destinations to live and work in. PCMC’s superior infrastructure has attracted the highest number of multinational companies and industries to the region, and this has also led to the highest rate of employment creation in PCMC. As a result, the Pimpri-Chinchwad Municipal Corporation has emerged as the most preferred city for home buyers who are looking to live close to where they work – and simultaneously enjoy a superior quality of life.

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.

What Is The Ideal Time To Hold And Sell Investment Property?

Anil-PharandeAnil Pharande, CMD – Pharande Spaces
The Indian real estate market is among the most lucrative for making investments. Barring grave global crises such as the most recent one, this market will not go downhill and provide very decent returns to investors.
Before the global financial crisis (GFC) or recession that hit the world in 2008, real estate investors made great profits on properties which they had held for just few months. During the recession itself, property markets plummeted and there were no takers for real estate.
However, this was an unnatural situation – as the situation improved and things came back to normal, real estate market across the world became calmer.  In a normal market scenario, property rates rise at a steady pace and uneven or abrupt rises or declines do not happen.
Types of investors
There are two types of investors into properties – those who look at making a regular rental income and have no plans of exiting the same, and those who look for capital gains. For the latter type, earning good returns requires them to time the sale of the property well. Only when the property has seen decent price appreciation does it make sense to put it on the resale market. The question is – what is the right time to sell?
investment
Ideal time span to remain invested
This subject is incessantly debated, and there are various opinions on it. However, it is generally agreed that in normal market conditions, the real estate market should be looked at as a long-term investment bet. What this means in real terms is that a good ‘holding period’ for properties purchased for capital appreciation is around three years, with the ideal period being 3-5 years. However, it has actually been seen that the best returns on investment on properties are actually obtained in a period between 5-7 years.
Ideal time for exiting
The perfect time to exit from a real estate investment will actually depend more on one’s expectations than on market conditions. While exiting after three years should ensure decent returns on investment, one would have to extend the horizon if the expectation is for the highest possible profit.
Investors looking for the highest capital gains from their property investments should target residential projects that are under construction, rather than completed projects. The best time to invest in such properties is during the time of launch. Thereafter, while some experts feel that the best time to exit such properties is when the project is nearing completion (or latest when the developer starts handing over possession to buyers); others advise investors to target one year after possession as the perfect exit time.
Which of these horizons make the most sense will really depend on local market conditions such as demand, supply and infrastructure development of the region. Before taking a decision to either buy or sell an investment property, a thorough understanding of the current local property market is in any case de rigueur.

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.