RICS releases white paper to analyse the impact of GST & RERA on the real estate sector

by Shrutee K/DNS

Mumbai, 22nd November 2016: RICS, the world’s leading self-regulatory professional body for qualifications and standards in land, property, construction and associated environment issues, in association with RICS School of Built Environment, Amity University today announced the release of a white paper titled ‘Decoding GST and Real Estate Regulation’. The document was released by Shri Rajiv Ranjan Mishra, Joint Secretary (Housing), Ministry of Housing and Urban Alleviation, Government of India in the presence of Mr Sean Tompkins - Global CEO, RICS, Ms Amanda Clack FRICS - President, RICS & Partner & Head, Infrastructure - E&Y and Mr Sachin Sandhir, Global Managing Director, Emerging Business, RICS. 

The white paper explores the nuances of the impact of GST and Real Estate (Regulation and Development) Act on the real estate sector and examines specifically if there are any issues that could cause ambiguities or discrepancies in the sector.

As per findings from the white paper, Goods and Services Tax (GST) could shift focus of real estate developers towards the high volume, low to medium income segment. Mr Sachin Sandhir, Global Managing Director – Emerging Business, RICS said, “GST will lower real estate costs for the affordable segment of housing while increasing costs for the premium segment. A large part of    the real estate market- almost 70 per cent, is skewed towards middle to high income segment of housing.  We might see developers (especially smaller developers) shift their focus to   low income housing to gain from GST”.

Shri Rajiv Ranjan, Joint Secretary, (Housing), Ministry of Housing and Urban Alleviation, Government of India while releasing the white paper said, “The attempt has been made in the real estate act to balance the requirements of all the key stake holders namely consumers, developers as well as real estate agents. We expect much more professionalism is going to come as we start progressing on this implementation of this act and ultimately, we may have a situation where projects are delivered as contemplated as per the time lines. Two of the states, Gujarat and UP also notified the rules before 31st October and many states are also at the advanced stage. We expect that the implementation of the act will start at the field level at the earliest and the benefits will start accruing to the sector, consumers, developers, everyone.”

The white paper concludes that GST by itself cannot be treated as a panacea to real estate market woes – both for the buyer as well as for the seller or developer. Broader policies in land and housing/ commercial stock management, ensuring availability of appropriate financing resources etc. will be just as important to leverage the opportunity posed by GST. Real Estate (Regulation and Development) Act, 2016, the other law that will have a long lasting impact on the real estate sector will help in ensuring that real estate projects get completed on time. Provisions in the Act such as imposition of similar penal interest for developers and homebuyers will incentivise timely delivery of projects, says the white paper.

Excerpts from the white paper

Goods and Service Tax: GST was not fundamentally designed with the real estate sector in mind, though this sector stands to gain reasonably from this. The problem with real estate is that it is classically neither a ‘good’ nor a ‘service’ – but the taxes that GST is supposed to replace – are levied on the real estate product at various stages of production – such as service tax on construction, VAT on materials and the finished product.

The above condition led to a ‘cascading’ effect on taxes, akin to a tax levied on taxes already paid in preceding activities and included in the costs till the point of taxation. Since VAT and service tax are governed by different rules, the issue of tax credits was never entertained till now. With GST, there is now a potential for recognising taxes paid along the production chain as tax credited, and if applied as such, could lead to a lower tax component in the effective price of the real estate product leading to a lower overall price.

The interesting thing to see will be as to how various real estate segments and input components are categorised in terms of applicable rates. The GST Council has set forth ‘slabs’ of tax incidence – with the highest being at 28 per cent. If the present regime of exemptions, such as the waiver of service tax for contractors working on affordable housing units were to be followed it could imply that certain segments of real estate, such as affordable housing would stand to gain through a lower incidence of tax, as opposed to luxury segments. This logic could also be used to create lower incidences of tax on materials and technology that have better compliance to sustainability goals than others.

Stamp duty has been kept out of the ambit of taxes that have been subsumed by GST since a tax on the ‘stamp’ would not qualify either as a tax on a ‘good’ or on a ‘service’. However, given the fact that at present the focus on GST is to appropriately compensate States for the revenue loss on account of State taxes that have been subsumed into GST, it is possible that some States may increase the incidence of stamp duty or surcharges thereupon to meet any revenue shortfall. Stamp duty, irrespective of the logic under which it is levied – still contributes to the effective price paid by a purchaser – and any such reactionary increase could – at least in theory – stand to water down the gains otherwise achieved through GST.

GST will also contribute to normalising the tax incidence on the same good or service across different States and removing taxation on interstate movements – it is very likely that the warehousing and logistics sector will stand to gain in this process, since placement of possibly larger warehousing and logistics hubs will depend almost entirely on transportation and connectivity, as opposed to being influenced by incidence of intestate taxation.

Real Estate (Regulation & Development) Act, 2016: The Real Estate (Regulation & Development) Act, 2016 is a step in the right direction – though it still leaves several gaps that have to be addressed before the law can perform as a framework for accountability through which both purchasers and developers can expect fairness.  The law in itself has been skewed against developers – largely due to the negative perception that has been generated in the market on account of poor performance, non-delivery of real estate products on time and so on; but there are certain provisions that may still prove difficult to implement. States, which are expected to make rules and regulation appurtenant to the law, appear to be diluting both the letter and spirit of the law, such as definitions and applicability of the law.

The law certainly requires considerable reconciliation with pre-existing laws prevailing in States, which the States are constitutionally empowered to enact and enforce – such as Apartment Ownership Laws and the land revenue code. Similarly, the law is expected to be effective in ‘urban areas’ – a term that can vary between States – and could well result in a situation where a real estate project is exempt simply because a particular area hasn’t been statutorily declared ‘urban’, such as a census town.

The law makes it reasonably clear that public authorities such as development authorities, housing boards and municipal bodies – who are regularly engaged in development of new real estate, be categorised as ‘promoters’. However, it is silent on what would happen if any laws governing these bodies in conflict with the provisions of the law. A cooperative society engaged in self-provisioning of real estate is also treated as a promoter, except that such a society functions quite differently from a developer or promoter as the real estate industry is accustomed to – being both developer as well as consumer at the same time. Separate rule sets may be required for these categories of developers so as to be able to adhere to the letter and spirit of the law.

The Authority itself takes on a daunting responsibility – that of ensuring that a project is completed within the designated timeframe and has all requisite approvals and clearances in place, apart from keeping such information in public domain for consumers. However, such Authority cannot certify or assure the number of approvals actually required in the first place. Its rules need to be synchronised with municipal rules. For instance, the law does not permit changes in design by a developer unless two thirds of the purchasers agree to such a change – but is silent on what happens if (1) less than two thirds of the stock has been booked and (2) the changes in design are already condoned by the building control authority or municipality with or without a compounding fee.

The obligations of real estate agents who are also included within the ambit of the law, have not been laid down specifically. This would make it difficult to justify setting up entry requirements for the trade or profession – or set forth a course for professional development. To be fair, the law does propose some futuristic approaches that are only now being explored such as title insurance; but doesn’t address the fact that titling of immovable assets in India is still presumptive at best.

The condition of maintaining 70 per cent of all receipts in an escrow account to be used dedicatedly within the same project has been kept with the intent to prevent overleveraging by developers, and has been seen as a welcome step from the consumers’ perspective. However, this could work negatively for smaller developers working in tier II and tier III cities, where markets are neither as volatile nor moving as larger cities. Even in larger cities, developers could face cash flow issues with a smaller amount being available for spending. A potential side effect of this clause could be the disappearance of pre-launch and no-payment-till-possession offers.

It is generally acknowledged that the above ‘rough edges’ will smoothen over time, resulting from experience gained on the ground, case law and informed demand from the stakeholders. Till then, there is a need for informed debate and analysis of how the law will affect different circumstances of real estate development.

The white paper can be downloaded from the following link Decoding GST and Real Estate Regulation

About RICS: RICS is a global professional body. We promote and enforce the highest professional qualification and standards in the development and management of land, real estate, construction and infrastructure. Our name promises the consistent delivery of standards – bringing confidence to the markets we serve. The work of our professionals creates a safer world: we are proud of our profession’s reputation and we guard it fiercely. RICS offers a wide range of executive education & training solutions for real estate and construction professionals as well as employers. RICS School of Built Environment, Amity University and its faculty are the delivery partners for such training programs.

www.rics.org