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GST Impact on Real Estate

How Budget 2017 could make a bigger impact for real estate sector




Budget 2017

Housing for All by 2022 cannot be achieved without structural changes by central government.

Housing is a state subject. A wish list in Union Budget, therefore, sounds out of place. But an onerous target of Housing for All by 2022 cannot be achieved without structural changes by central government. The Real Estate (Regulation and Development) Act, 2016 (RERA) notification was one such step but much more needs to be done.

The key amongst them are:

1. Industrial approach towards taxation:

Across the manufacturing sector, taxes like excise duty are payable on delivery of product. In real estate, most of the taxes are payable either at the approval stage or at the time of booking a home. Why cann all taxes in real estate not be payable at the time of delivery?

The earlier argument against delivery-based tax-collection was that there was no security mechanism for government to collect taxes from developers. But now the RERA-mandated Project Escrow Account can provide enough security for collection of government taxes.

The purpose is not just reduction of cost of homes but a more strategic one. Linking government revenues to delivery of projects will make government authorities stakeholders in housing projects and will make them morally responsible towards completion of projects.

The role of government authorities will shift from being value extractors to co-partners in real estate projects. Thus, benefiting both developers and home buyers.

2. GST benefit to entire supply chain:

“Taxes paid on inputs can be offset against taxes paid on finished product.”

GST aims to achieve the above for all products except homes. Stamp duty on land, municipal taxes and so on paid by developers cannot be offset against stamp duty/VAT paid by home buyers, resulting in high costs due to the cascading effect.

Classifying all taxes paid by developers as GST is not only fair and justified, but also works towards making homes affordable.

3. Equity in property assessment taxes:

In any city, citizens staying in old homes constitute over 90 per cent of the population. State governments and municipal corporations find it politically unfriendly to increase house tax on old homes. This results in high maintenance cost for new homes. The central government needs to step in and bring in parity by restricting the maximum difference in taxation rate between old and new homes.

4. Home buyers fund for distressed projects:

Many projects are currently stuck midway because developers lack funds. Those who have booked homes have lost faith and do not want to pay more, new buyers are not in sight and banks do not want to fund them. Such incomplete projects have not only resulted in loss of faith but have also restricted housing supply as they are sitting on large parcels of land. Moreover, state governments and municipal corporations are clueless.

The solution lies on the lines of investor protection fund in stock market. Central government should create a home buyers fund where every home buyer contributes 0.1 per cent of the purchase consideration. This fund, which can generate few hundreds of crores can be used as seed capital to fund distressed projects.

The above initiatives can have a big impact on the supply and affordability of homes across the nations. But the same can be done only with central government’s initiative on this state subject.


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