16 May 17 Will GST really revive the real estate sector?
Latest reports suggest that the GST (goods and services tax) roll out for July 1 is on schedule. While the Indian government is busy ironing out the implementation challenges, lately a lot has been said about the possible impact of GST on the real estate sector. Broadly speaking, there are two key points that have been discussed:
- Cloud surrounding the final GST rate on real estate – experts are divided on this; some suggesting the lower 12% slab, while others 18%
- Continual of reduced tax scheme (abatement) – currently 70-75% abatement of land, whereas under GST it may be only about 25%
- Affordable housing – the current service tax exemption for affordable housing is likely to continue under GST
With all this speculation, it is really difficult to guess whether or not GST will have a positive impact on the real estate sector. However, there is another area which may benefit – GST on key construction inputs.
GST to result in significant cost savings for key building materials – cement and steel.
Cement: Indirect taxes on cement currently amount to about 27-32%. However, with the implementation of GST, this is expected to reduce to 18-20%. Transportation costs comprise of 20-25% of the total revenues of these companies. GST implementation is expected to reduce transit time, number of warehouses, as well as interstate barriers resulting in significantly lower transportation costs, and hence improved margins.
Steel:The domestic steel industry in India has been plagued with low margins and high imports. However, this picture will change post the implementation of GST. The production cost will reduce as the rate of GST is expected to be 12% against the current indirect tax rate of around 20%. The industry predicts transportation costs will also significantly reduce as there will be 40-45% saving in time, especially when trucks pass through different states.
While these two critical sectors are expected to witness improved margins after GST is implemented, it is likely that there will be a deflationary trend on their prices. This will have a direct positive impact on the cost of construction and it is likely that this benefit will be passed on to the consumers. This will, at least, ensure prices to remain stable, or at best, a marginal price reduction.
A recent article published in the Mint highlights that in the past five years mortgage rates have dropped about 2.75 percentage points. At the same time, per capita incomes have posted a compounded annual growth rate of about 10%. This combined with stable price rates is expected to increase affordability significantly.
If this deflationary trend (real estate prices and mortgage rates) continues and results in increased affordability for the home buyer, we may well be looking at a huge uptake in real estate demand in India.
Implementation of GST along with other initiatives such as RERA (Real Estate Regulation andDevelopment Act, 2016), Housing for All (Urban and Rural), amendments to Benami Transactions Act, infrastructure status to affordable housing, among others, are expected to significantly improve the overall business sentiment and revive the real estate sector.