India’s biggest tax reform will boost the real estate industry

India will roll out its biggest ever tax reform on July 1 - and it is likely to positively impact India's real estate industry.

The new Goods and Services Tax (GST) is a uniform tax regime that will replace the current convoluted system of separate taxes at the national and state levels, and is likely to boost foreign investment in various sectors, including real estate.

Currently, Service Tax, and Value-Added Tax (VAT) are levied on the buyer at the time of purchasing under-construction residential unit. There are many other non-creditable tax costs, like excise duty, customs duty, CST, entry tax, etc that are paid by the developer. These tax costs are factored into the purchase price. The cost of these taxes may be as much as 25% of the purchase price. All these taxes will be replaced by GST.

A 12% GST rate will be applicable to real estate, according to the initial announcement by the Indian government. The measure will likely bring down prices of affordable and mid-level housing projects, as taxation will become more uniform and construction costs will come down.

GST will also cut the cash component in construction because, to get input tax credit, inputs have to be sourced from registered vendors. This will curb the practice of using black money in the construction sector, experts say.

“The basic construction cost is likely to come down a little while luxury real estate may not be benefited, as most of the construction goods are likely to incur 28 percent GST rate. Further, improved efficiency in logistics should also help reduce prices of goods,” Amit Oberoi, National Director, Knowledge Systems, Colliers International India, was quoted as saying.

The Indian government has introduced several major reforms in the real estate sector recently, most notably the Real Estate Regulation Act that aims to regulate the sector, and bring clarity for both buyers and developers. Under the law, all state governments must establish a State Real Estate Regulatory Authority, which buyers can approach when seeking to redress grievances against builders.