GST would match or be lower than the multiple indirect taxes on real estate
June, 20th 2017
Goods and Services Tax (GST) is set to get implemented from 1 July 2017. There are different GST rates prescribed for various goods and services, which may impact their cost. A homebuyer will have to pay GST at the rate of 12% to buy a home. We talked to Rajeev Talwar, chief executive officer, DLF Ltd and chairman, National Real Estate Development Council (Naredco), about how GST will impact home prices. Along with GST, we also discussed the implementation of Real Estate (Regulation and Development) Act, 2016 (RERA), and more. Edited excerpts:
How will GST impact home prices?
Real estate sector was heavily taxed and we welcome a single stable 12% GST rate, inclusive of the value of land and with full Input Tax Credits. We are of the view that the actual tax impact under GST would match or would be lower than the existing multiple indirect taxes on the sector. There are a few things where we are still awaiting clarity like whether affordable housing will remain out of the ambit of GST or not, as is the case at present for implication of service tax, or whether there will be any abatement for homebuyers.
If not home prices, will it impact the profit margins of developers?
About margins, again it will be too early to say. But yes, margins will get impacted because when the tax is lower, prices should come down. Maybe some margins do get impacted and maybe in some areas they will remain unchanged. It may impact different segments differently, like affordable or luxury segments, because you have to pay a higher tax on higher-costing products. So maybe in case of luxury housing segment, there could be some impact on margins. But then when you say luxury or the premium segment, then the premium there also exists to take care of it. So, I think, hopefully it will allow a fair play of market forces.
GST is scheduled to get implemented from 1 July. At the same time RERA requires all the ongoing projects to get registered before 31 July. How are real estate developers managing these two big reforms? Do you think a 3-month window to get the ongoing projects registered is less?
No, we don’t think so. We were preparing for all such statutory requirements for long. Besides that, there is enough computerization in India. There are enough digital initiatives. I am sure that the earlier the Act gets implemented the better it will be. It will give time for people to get accustomed to the new ways of working or to the new regime, whether it is in real estate or taxation. I am sure this will not pose a problem.
A few states have diluted some rules of the Act. For instance, while the central Act mandatorily requires all the ongoing real estate projects as of 1 May to get registered under the Act, some states have excluded projects that have applied for Completion Certificate (CC) or Occupation Certificate (OC), or if they have handed over the project to authority or the residents’ welfare association (RWA). What are your views on this?
Right now, we think that everywhere the occupation certificates have not been obtained for any projects, they will have to get registered. I guess the central law, which is the model law that every state will have to adopt, allows the states to make a few amendments. Maybe they can make a change like that but it will depend on state to state.
However, I think if a builder has already applied for OC or CC, that means that the building is complete. Because if the developer has applied for the CC, the responsibility of the developers seems to be fulfilled, but it may take time for processing. So, maybe the government there has thought that yes, it might simplify things because there will be a burden on the developer as well as the state authorities to process so many more applications. Maybe for that reason it has been done.
Many state governments have missed the deadline of 1 May 2017 to notify the rules under Real Estate (regulation and development) Act, 2016. How will this delay in implementation impact the real estate market?
I think that is where we need to pay special attention. And I am certain that the union urban development minister has been following the states very vigorously in order to have each state notify the rules and regulations and also set-up the authorities. Because not having those will leave many questions open and therefore eventually cause confusion.
For instance, one of the things can be that what happens to ongoing projects where there is no authority in any state. How do you register? If you don’t register, can you sell, can you advertise, at least till 31 July? So I think all these questions need to be answered very soon.
What are the problems that developers are facing to register projects where a regulator has been put in place?
In some cases, there is lack of clarity on certain aspects of the system; for instance, whether it is going to be entirely online or whether one needs to provide hardcopies. All these have to be worked out by each state. I think it is a very good piece of legislation. It has been deliberated for a number of years and then by various authorities in the parliament, and the customary actions have been taken. So, what we need is not to analyse it right now but to implement it right away.
Affordable housing is a segment where some traction is happening currently. Government is also in support of the segment with initiatives like ‘Housing for all by 2022’ mission. Does DLF have any plans to get into this segment?
There have been rules and regulations in various states where it is mandatory to provide a certain amount of what we now call affordable housing. Earlier it was called Economic Wicker Section (EWS) or it was of some size, i.e. 300 sq. ft. DLF has been building and meeting those mandatory requirements consistently.
Our projects for affordable housing are those that are linked to our main projects. Actually, till today there was no such policy where you could announce an affordable housing scheme and get encouragement for it. Now the scheme has come out. Now the government has announced various incentives for affordable housing. Let’s wait and see. Besides that, every developer has its own specialty and I think it depends on that. One for each one and we’ll have to see how the future unfolds.
and Pooling Policy has been approved and implemented in Delhi. This development opens up investment opportunity and possibility of large housing society to come up in the national capital? How do you see this development and what impact will it have on property prices in Delhi?
It will surely bring down the prices. From a homebuyer’s perspective the larger the supply of land, the lower the price. So the idea should be to promote more and more, get over problem of floor space index (FSI) or floor area ratio (FAR) or density and allow greater development. Because that is what the people want. They want a home, then why are we not allowing them to make it. Let’s go higher. Let’s provide more facilities; the more they construct the lesser people will have to either sleep on the roads or sleep in slums or stay in unauthorised colonies. The greater the authorized construction activity, the better it will be for all of us.