Here’s how GST will impact the real estate sector in India?

GST, which has been one of the longest awaited tax reforms, got unanimous approval of both houses of parliament this monsoon session. Union government of India has set a deadline of April 2017 for its roll out. As of now 3 states have already ratified the bill and others will quickly follow. How it might impact taxes in residential real estate transactions has got varied views of industry experts. Through this article we will try to detail out the issues involved to give a better understanding of these varied views.

Lets first understand the various taxes applicable in a residential real estate transaction.

1.     Service Tax – If you are purchasing an under-construction property, developer will have to charge you service tax and deposit it with central government. This tax was not applicable till 1st July 2010. The key reason for the same was contract between builder and buyer for construction of residential unit was disputed as works contract as it also includes value of land. Hence rules regarding taxes on work contract was not applicable on residential complex construction. In finance act 2010, government added an explanation to definition of construction of residential complex and made it deemed service. For the simplicity sake government has given abatement of 3/4th of cost of unit as land and goods for construction and only 1/4th of the cost of unit is treated as service. Hence presently most homebuyers are paying 3.75% of cost of unit as service tax (1/4th of 15%). Recently service tax on under construction property has again been put under question as Delhi High Court ruled against this and matter is sub-judice at Supreme Court of India.

2. VAT (Value Added Tax) – If you are purchasing an under-construction property, you will have to pay additional VAT in some states such as Karnataka, Haryana and Maharashtra. Developers charge this value added tax and deposit it with state government. VAT has also been under dispute for long time and still there are many states such as UP who do not charge VAT. Also unlike service tax there is no uniform way of computing VAT across states. E.g. in Maharashtra under composition scheme VAT is charged as 1% of agreement value whereas in Haryana the same proposal was passed but not yet agreed by developers. In Karnataka VAT is charged at 5% of agreement value of unit. To calculate accurate value of VAT and not use composition scheme, developers will have to maintain proper accounts of goods purchased for construction and VAT paid by them for the same to get input credits which is cumbersome and makes it tough for buyers to understand.

3. Stamp Duty – Stamp duty is charged by state government, again at varying rates, for registration of sale agreement for real estate transactions.

Incidentally if you are buying a ready to move-in property directly from developer after he has obtained completion certificate from authority, you don’t need to pay service tax and VAT hence saving 3.75% to 9% of property cost depending on state where you are buying property.

Now lets understand how GST will impact these three taxes. Service Tax and VAT will be replaced by Central GST and State GST whereas stamp duty stay unchanged as it is out of purview of GST.

There are two open items because of which at present it is difficult to predict accurately the impact of GST on real estate transactions. One is the GST rate and second is abatement for land value in total agreement value of under construction residential unit. Let me take assumptions on these two items to estimate impact of GST. These assumptions might be off but has a high probability of being true as well. GST rate might be set at 18% as many experts back this rate and abatement of land might be only 25% of agreement value as 50% is assumed to be cost of goods and remaining 25% as cost of service. Based on these assumptions the effective GST on under construction property transaction will be 13.5% (3/4th of 18%). Now this rate is significantly high compared to 3.75% – 9% currently being paid. Hence we can assume cost of buying under-construction property will significantly increase after GST becomes applicable from 1st April 2017.

But this might not be true. Currently developers pay service tax and VAT on services and goods they procure for construction of residential complex but are not allowed to take input credits of this tax because of which end customer pays tax on tax. As per estimates given by developer community this tax on tax adds up to 20 – 25% of the cost of residential unit. Hence if GST is implemented and developers are allowed to take free credits of input tax paid, the cost of unit should reduce by 20% at least. To understand this better lets take an example, a residential apartment which is sold at Rs 100 today finally cost end customer 103.75 in Uttar Pradesh excluding stamp and registration duty. If post GST price of unit is reduced by 20% i.e., it becomes Rs 80 then final cost to end customer will be 80 + (13.5% of 80) i.e., Rs 90.8 which is much less than Rs 103.75. So in fact if developers pass the benefit, which they will get from GST, cost to end customer actually will reduce.

But it is easier said than done. First of all current under construction projects are at different stages of construction and developers would have already paid service tax and VAT for procurement of goods and services for which they will not get input credit. Hence cost reduction will be lesser than 20% for current under construction project. Second model GST law clearly mentions input credit will not be available for goods and services purchased for execution of work contracts. Presently we have seen two different interpretations by courts of whether construction of residential complex is a work contract or not. If it is treated as a work contract cost of developer will not reduce at all after GST implementation. Another issue which needs to be kept in mind is, presently government does not allow input credit if the composition scheme (i.e., abatements for cost of land and goods) is used by developers for calculating service tax and VAT.

Therefore at present, we are more likely to believe that cost of under construction residential unit will increase post GST implementation. This will be a hefty blow to industry, which is already suffering from slow sales. Industry bodies need to urgently engage with government to minimize this impact by clarifying position on works contract, composition scheme and already paid service tax and VAT by developers on under construction property.

Lucknow; An Ideal Place to Dwell

Lucknow is the most commonly known as ‘the city of Nawabs’ and it does live upto its name. It has been seen that Tier 2 cities have a busy lifestyle and fast paced schedule. But when it comes to Lucknow, then the scenario is completely different. Despite being a top city in the state, Lucknow has quite a laid back attitude. In old Lucknow you can easily spot people standing near tea shop and gossiping. Here people always have time to speak to their loved ones and friends. In today’s time, where everybody has a deadline driven job, it becomes necessary to spend some time in peace and there are several places like Ambedkar Park, Kashiram Upwan to enjoy the evening.

The city of Lucknow is fast developing and the living standard of the people is rising day by day. The basic requirements to dwell in any city are power and water supply, good education, safety, transportaion and food& entertainment. Well, in all these departments Lucknow earns full marks. The city boasts of 21+ hours power and water supply, it has the best of convent schools and higher education institutes. Buses and other public transport system run throughout the city and hence any part of the city is easily approachable. As far as fooding habits are concerned, it has one of the best eateries right from Rattilal khaste, Ram Asrey sweets to Tudnay Kababi and Dastarkhawan. Above all these, Lucknow is considered a safe city as compared to other cities like Kanpur or Allahabad of the same state. Law and order is pretty much under control and the local crime graph is in decline mode.

All the above points clearly state that Lucknow can be treated as an ideal place to dwell and the city is better in many aspects and is quite inexpensive in comparison to its counterparts.

Top tips for a smart investor

Lucknow is fast shedding its image as a tier II city and graduating into a plausible investment ground.

Pratap Bidasaria is a 32-year old businessman. For work and settlement, he mostly stays away from his hometown Lucknow where he has his ancestral home. But when it comes to an investment, he settled for a second home in Gomti Nagar.

Biasaria is not alone, many natives of the city are contemplating on buying real estate assets.

Lucknow is fast shedding its image as a tier-II city and graduating into a plausible investment ground. Popular research firms such as CRISIL have already mapped this city as one with potential.

No wonder, while on one hand, homebuyers are eying upcoming sectors of Noida for an investment, many others have realised Lucknow's calibre as the real estate capital of the state.

Investing in Lucknow

Manohar Vidhyarthi, broker at Shankar Property Venue says, "Entry costs are relatively less than

what it is in big cities but Lucknow's potential is promising. If you are an investor, consider areas such as Gomti Nagar. It is a prime area with values in the range of Rs 25 lakh to Rs 1 crore. Rental market for spacious 2 and 3-BHK units runs at Rs 7,000-25,000 per month."

As per data with Magicbricks, one could look at areas like Gomti Nagar, Hazratganj, Mahanagar, Jankipuram, Vikas Nagar and Indira Nagar for sizeable rental returns.

This is because of proximity to job drivers which makes it easier to get constant income as rents.

Manas Singh, consultant, Mansa Property Services says, "One can see that older areas like Rajabazaar, Rajajipuram, Rakabganj became thickly-populated due to relatively low real estate values. Infrastructure herein is poor but areas like Chowk still command as much for a property as you would have to shell for an average flat in Gomti Nagar. In the older areas of Lucknow, buyers are usually more traditional. They would already have their houses here but try to expand by renovation or a second investment in the same area."

Singh further says, "The newer generation of buyers wants to keep away from crowd and thus options like Gomti Nagar open up to them. These are either end-users or pure investors. Moreover, while traditional areas have independent houses, new buyers are looking at apartments for safety and convenience. Every prospective buyer knows that if they ever need to move out of the city for work, they can always bank on their flats in such areas for regular rental returns."

Properties trending in Lucknow

"Independent houses and plots have always defined Lucknow's tehzeeb and culture. But buyers are drifting towards a transition. Most young investors do not wish to wait till a layout develops in about four to five years and therefore plotted developments are losing its charm. Tenants also prefer apartments to independent houses because of the safety factor," notes Vidhyarthi.

"The fact that the rich live in bungalows have also become irrelevant in today's context. Real estate has emerged as a safe option for investment. Many wealthy buyers are opting for spacious apartments. These are either bureaucrats or those that have got transferred to the city as senior management in some corporate firm in Lucknow. This has made new age investors to invest in apartments because they realise that the city is transforming and they no longer need palatial houses to charm a potential tenant," adds Vidhyarthi.

Clearly, there seems to have been a shift.

Trend watchers feel that buyers are opting for more investment.

"If a conscious buyer has Rs 1 crore in hand, he would learn how to make two investments, one for end-use and one for rental returns," believes Nandan Pushp of Aangan Properties.

Before investing in the Lucknow market as an investor, it is advisable to check areas close to business districts, colleges to make the right investment!

Sneha Sharon Mammen, Times Property, Magicbricks Bureau/ Lucknow

Emerging growth corridors in India make way for invests

When the new government took charge in 2014, it was expected that the real estate market would get revived, but property prices remained low. As a result, the urgency that usually surrounds the decision to buy a house-for investment or residence alike-abated. What replaced this urgency was complacency; would-be home buyers began to feel that since prices are in a downward spiral, they should delay the purchase of a home until prices fall even further. 

But data suggests that the realty market has remained stagnant, and it is unlikely that property prices will fall even in the latter half of 2016. Thus, these delays may very well be in vain.

Further, experts from JLL India and Cushman and Wakefield suggest that prices of real estate are likely to rise in 2017 and beyond, confirming that 2016 may be the last year that homeowners can enjoy reduced rates. 

Deciding where to invest

Even if you've made the decision to invest, choosing a location to buy property can seem like shooting in the dark. For people who bought houses in Gurgaon 20 years ago, for instance, the property price appreciation would have been a life-changingly pleasant surprise. Similarly, Powai wasn't always the buzzing entrepreurial hub that it is today. But with massive investment in infrastructure and setting up connectivity with Mumbai and other suburbs, it now boasts of being the birthplace of pioneering startups such as Housing and Olacabs and one of the most sought after real estate locations.

But is there a way that you too can discover areas that are on the verge of a real estate boom?

As of January this year, there might just be. As part of its "Smart Cities Mission", the government released the first list of 20 cities it is working towards making "Smart". This list has made it much easier to recognise signs of development a real estate investor must look out for when deciding where to invest. 

You see, when a city has secured adequate water and electricity supply, proper sanitation and waste disposal systems, robust IT connectivity and digitalisation, effective health and education facilities or even greater connectivity to metros, it shows the government's dedication to developing it.

Further, as companies start setting up base, there is an influx of employees, and that increases the residential real estate demand, forcing property prices up. Boisar, an industrial town on the outskirts of Mumbai, would not have been on a home buyer's radar up until a few years ago.

It was under gram panchayat rule and lacked connectivity to any major metros. However, Boisar is now being connected to Mumbai and Gujarat through a 4 lane railway track, and to Delhi through the Delhi-Mumbai Industrial Corridor.

The last decade has also witnessed the creation of over 1,00,000 jobs with companies such as TATA, Raymond and Bombay Rayon setting up shop, as well as the establishment of reputed hospitals and educational institutions in Boisar. These factors have increased the demand for residential real estate, due to which property prices are on the verge of rising.

Similarly, Bahadurgarh was an unknown city in Haryana, until it got its own station on the Delhi Metro rail network and became a part of Delhi NCR. Now, with investors such as TATA Housing having invested 600 crores in affordable housing projects, it's one of the emerging corridors to buy property.

What this means for home-buyers is that identifying ideal places to invest isn't out of your grasp anymore. When signs of development begin to appear, it means that real estate prices are on the cusp of rising. To benefit from this extensive growth and appreciation, it's essential you grab the opportunity to buy a home before it's too late. 

Real Estate Regulation and Development Bill

A bill seeking to regulate the real estate sector, bring in transparency and help protect consumer interests was passed by the Rajya Sabha today.

Moving 'The Real Estate (Regulation and Development) Bill, 2013' for consideration and passage, Urban Development Minister M Venkaiah Naidu said it aims to protect the interests of buyers and bring more transparency in the sector.

The Congress had extended its support to the Bill, which was passed by a voice vote in the House. It is touted as a major reform measure to regulate the vast real estate sector and bring order in it.

READ: Real Estate Regulator Bill passed! 10 things you should know about it

"The Bill is need of the hour," Naidu said, responding to clarifications by members saying it can see further changes in the coming times. He also sought the support of AIADMK members, who had opposed the measure.

He said the bill would prohibit unaccounted money from being pumped into the sector and as now 70 per cent of the money has to be deposited in bank accounts through cheques.

"There will be no discrmination of any kind on basis of religion, region, caste, creed or sex and gender and we will include that in the rules," Naidu said, responding to members' clarification, adding "there has to be single-window clearance for all approvals."

The Bill also provides for imprisonment of up to three years in case of promoters and up to one year in case of real estate agents and buyers for any violation of orders of Appellate Tribunals or monetary  penalties or both.

Naidu said it proposed that a minimum of 70 per cent collections from buyers should be deposited in separate escrow account to cover cost of construction and land.

It will help establish state-level Real Estate Regulatory Authorities (RERAs) to regulate transactions related to both residential and commercial projects and ensure their timely completion and handover, the Minister said.

Appellate Tribunals will now be required to adjudicate cases in 60 days as against the earlier provision of 90 days and Regulatory Authorities to dispose of complaints in 60 days while no time frame was indicated in earlier Bill, he said.

"It brings in only a regulation and not strangulation. This Bill is not against anyone...Real Estate Bill will renew investors' confidence and ensure timely completion of projects and create more opportunities. In this way, it will help in achieving the target of 'Housing For All'," he said.  

Shaheed path: On a growth path

One of the most preferred areas for homebuyers in Lucknow, Shadeed Path offers the best at an affordable rate.

Over the years Shaheed Path has emerged as one the most popular residential areas preferred by investors and homebuyers alike. People from different parts of the Lucknow and also from other parts of the state have made Shaheed Path their homes.

There are 2 and 3-BHK residential houses offered from Rs 20 lakh onwards. The amenities provided includes reserved parking, lifts, power back up, 24X7 water and electricity supply and security.

In Shaheed Path, the most popular units are 2 and 3BHK flats. A 3-BHK apartment of 1200-2400 sq ft in size is offered between Rs 34 to 81 lakh. One may buy a 2BHKs in the budget segment of Rs 20 to 48 lakh. These 2 BHK houses are 1000-1400 sq ft in size.

Attractions

Shaheed Path is an elevated outer bypass road. It connects two National Highways -Kanpur Road (NH-25) with Faizabad Road (NH-28).

The total stretch of the flyover is 22.5 km.

The four-lane flyover has uniform width and starts from Transport Nagar at Kanpur Road and meets at Chinhat at Faizabad Road.

Jai Prakash Narayan International Convention Center is under-construction and is likely to be completed by October 2016. There will be a museum, library, guest house, open gym and spa for recreation within the premises of the centre. Once completed this will be another attraction of the area. The Convention Center connects important localities like Gomti Nagar and Gomti Nagar Extension to allow residents to use the facility accordingly. The elevated service lane near Vipul Khand in Gomti Nagar is yet to be completed.

Some of the localities present close by are Vibhuti Khand, Vikrant Khand, Gomti Nagar and Vivek Khand and being surrounded by such residential hubs also makes Shaheed Path more popular. The UPSRTC bus services ply within the area connecting it to the other parts of the city. Although, swift connectivity is available, currently very limited public transportation is operational in these areas. To ease the commute, an underpass is under construction near the LDA area. Once the underpass gets operational, it will benefit the residents of Indira Nagar, Amar Shaheed Path, Makhdoom Pur, Shaheed Path and Faizabad Road.

Metro connectivity

The upcoming Metro plans in Gomti Nagar will further enhance the connectivity leading to rise in demand of properties.

There are under construction, ready to move in and resale properties in the area. The area is growing a faster pace and is ideal for retirees, family and couples. The area has all the basic amenities for the local residents. There are more than six schools, four colleges, eights hospitals; more than seven restaurants and more than ten banks plus over six super markets.

Locational advantage

The locality is not far off from the airport and railway station. The Amausi International Airport is 23km via NH-25A and the Lucknow Railway Station is 13-km via Lohia Path. There is also good road connectivity with Amar Shaheed Path being connected to Faizabad Road which is less than one km away.

Atul, a resident of the locality says, "Shaheed Path is a good and peaceful residential locality to reside in. It is well-connected with shopping malls, airport, hospitals and schools. Gated communities present are secure and safe. It has rich flora and fauna. The physical and social infrastructure is within reachable proximity."

Source: Times Property, The Times of India, Lucknow

7th pay commission could work well for real estate

Pawan Jasuja, Director- Finlace Consulting

The impact of the 7th Pay Commission recommendations symbolizes the growing economy and I believe housing sector will be the biggest beneficiaries among all. Sudden rise in income and expenditure capacity of government employees may move towards real estate investment. The recommendations are likely to be involved in stimulating the demand of realty sector not only in metro but also in tier 2 & 3 cities too where property buyers are more demanding.

Suresh Garg, CMD,Nirala World & Secretary- CREDAI Western UP 

The move is expected to give an enormous boost to the real estate sector  as consumption demand in urban areas is likely rise owing to the rising income levels. It will enhance the loan eligibility and repaying capacity the individuals making them to invest or buy homes and also exploring the fact of considering bigger size units.

Vineet Relia, Managing Director, SARE Homes

In the wake of current economic indicators poised towards fiscal rectitude, the finance ministry today announced the seventh pay commission. The revised slabs would help to  flush in more liquidity in the market by broadening the channel of purchasing capacity of nearly one crore employees in India. The raise in hike would definitely have a ripple effect on private sector too. We as developers hail the government’s decision and the intent of the pay commission that would also help us to synergize with the growth of real estate and economic prosperity of the nation, coupled with boosting the investors sentiment to  new heights.

Anshuman Magazine, Chairman & MD, CBRE South Asia Pvt. Ltd.

“The Seventh Pay Commission announced by the Government today will not only benefit the estimated 10 million Central Government employees; but is also likely to provide an impetus to the residential and retail real estate markets in the country. With larger disposable income, we expect to see an increase uptick in consumption patterns. The increased cash flow could also help bring back interest in investing in the residential real estate market, especially in the affordable to mid-end housing segments.”