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Decoding Disruptions

Under GST, there will be more price clarity, due to a clear breakup of the actual cost and GST levied on it

Photo Credit : Ritesh Sharma

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The Real Estate Regulation Act (RERA) and Goods and Services Tax (GST) — two landmark reforms, will impact the real estate sector in general and consumers in particular.

The GST comes into effect from 1 July and RERA becomes operational after the three-month window, for its implementation ends in July. The RERA is being seen as a big consumer-friendly policy initiative. With stringent provisions for penalising developers for project delays, paying higher compensation to affected home buyers and safeguarding their investments by way of mandatory escrow accounts opening by developers, RERA has come as a big relief  for property consumers.
The compulsory registration  and mandatory disclosure of project details, ban on project launches without securing the necessary regulatory permissions and punitive action against developers for not complying with disclosures, will not only help property buyers take informed decisions, but also prevent developers from duping customers through malpractices, like altering project plans and specifications and escalating cost.

As RERA prescribes compulsory selling on carpet area basis, buyers will be saved from manipulation of super built area. So, in terms of space, they will get what they pay for, besides saving on registration charges, which will be levied on carpet area. Home buyers will be saved from ambiguity on charges like EDC, IDC, parking and maintenance. Under RERA, home buyers will get a fair deal in terms of quality, as developers are made liable for structural defects. The RERA offers quick redressal to aggrieved home buyers in 60 days and prescribes stringent punishment for defaulting developers.

It is being argued by a section of developers and experts that post-RERA, home prices will increase because of a likely dip in supply and an increase in holding cost, as developers will only be able to launch projects that can be completed in the promised time frame. It is also said that end-product prices will go up in view of a hike in land prices, following curbs on black money transactions due to demonetisation. But these arguments are misplaced, as land prices have already gone down and developers can keep up the supply by having sufficient cushion for timelines.

Revenue-neutral GST for real estate is seen as a positive measure. Under GST, real estate is covered partially, with GST applicable only to under-construction properties through work contracts taxed at 12 per cent (excluding stamp duty). Moreover, Input Tax Credit (ITC) is available to offset tax liability and neutralise any tax impact. Currently, there is a tax burden of 25-30 per cent on goods (construction material), whereas under GST, goods are taxed at 18-28 per cent. A single nation tax, subsuming all other indirect taxes, together with higher efficiency achieved in logistics due to free movement of goods at state borders, will considerably reduce compliance/administrative expenses borne by developers, thereby bringing down the cost of goods, to benefit consumers. Also, GST will put an end to double taxation, thereby checking any related addition to cost. Availing of ITC will lead to digital transactions, curbing flow of  black money that leads to artificial price inflation. In the case of affordable homes which are exempt of service tax, one expects clarification on exemption from GST, thereby providing price relief.

Under GST, there will be more price clarity, due to a clear breakup of the actual cost and GST levied on it. Developers’ bodies are, however, apprehensive that as stamp duty has not been subsumed within GST, it may push up home prices. But real estate experts do not buy this logic, saying that with full ITC available on construction materials, the effective GST rate will be less than 12 per cent, against the current real estate transaction taxes that range between 12-15 per cent. All in all, both RERA and GST, with other key reforms, are potential boons for property consumers.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Vinod Behl

The author is senior real estate media professional

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