Archives for 2018

On July 1 last year, the Goods and Services Tax (GST) had shaken up the real estate sector, already reeling from the after-effects of the two jolts of demonetisation and the Real Estate Regulatory Act (RERA).

But developers say the sector has somewhat overcome these setbacks.

Sector players say the benefits of GST — frequently termed as the “most radical tax reform in India’s history” — mostly lie in the long-termed macro-economic scenario while loopholes are many in the current scheme of things.

Are the consumers getting their share of benefit? Not so prominently yet. But all are hopeful of a brighter future.

A major problem the real estate market is facing is that of a higher tax rate on under-construction projects — 18 per cent — compared to the previous service tax of five per cent. However, the effective tax rate comes down to 12 per cent as a rebate of one-third is given as land abatement.

“The segment, which is really struggling, is the under-construction one in the medium or luxury range, which has the maximum supply available in the market right now,” Ankit Kansal, MD of 360 Realtors, a consultancy firm, told IANS.

“People started waiting for completion certificates or occupancy certificates before moving into these projects, because nobody wanted to pay 12 per cent over and above the cost of the project,” he added.

GST is not levied on ready-to-move-in properties and hence customers wait for the completion certificate to avoid paying the tax.

According to realty group EKTA World’s Chairman Ashok Mohanani, the tax percentage was set “much higher than what was anticipated”. The higher tax rate created a setback for both end-users and investors, Mohanani said.

The affordable housing segment, however, received a breather after the government in January slashed the effective tax rate on houses under the Pradhan Mantri Awas Yojana that provides credit-linked subsidy scheme of up to 8 per cent.

Although, a section of the market is content and says the affordable segment has grown since, some developers feel it should be slashed to the previous level of five per cent.

Another issue that should be addressed, developers feel, is that of land abatement.

The government gives a concession of one-third of the 18 per cent tax on a project, as land prices do not attract GST. However, realty players say the consideration that cost of land amounts to 33 per cent or one third of the total cost of project could be a flawed generalisation as land prices vary from place to place.

“Even though rebate is availed, the ratio is very low, thus making the flats expensive,” said Dhaval Ajmera, Director of Ajmera Group.

According to House of Hiranandani’s Chairman and Managing Director, Surendra Hiranandani, the land cost in the major metropolitan cities of the country is “almost 50-60 per cent of the total costs”, way higher than the government’s take of 33 per cent.

A solution to this problem, said Ankur Dhawan, the Chief Investment Officer of PropTiger.com, is to either bring land under GST or reduce GST for high-priced properties.

Knight Frank India’s Executive Director for north, Mudassir Zaidi, said the other impact of GST was that it brought about a change in the manner in which home-buyers dealt with the developers. GST brought in a concept of Input Tax Credit, that the developers can set off and they are supposed to pass on the benefit to the consumers.

“However, projects which were incomplete where they could not set-off earlier taxes like VAT (Value Added Tax) and service tax, etc., were not able to give input tax credit. Thus the most impacted projects were the ones that were incomplete and did not have an OC (Occupancy Certificate),” Zaidi said.

Kansal from 360 Realtors said there is no clear-cut method to pass on this benefit of the input tax credit to the customers.

“It has become very ambiguous. While one developer was giving a six per cent input rebate to the consumer, another gave four per cent,” he said, adding: “So, it’s completely discretionary on the developer… what he thinks or his finance team thinks.”

According to PropTiger.com’s Dhawan, many developers have not yet passed the full benefit of input tax credit to customers, eventually increasing the cost for buyers.

“Stamp duty” or the “registration cost” is another thorn in the side for the sector and property market players believe it should either be included in GST or abolished for good.

Surender Singh, Director of GLS Group, said: “Stamp duty should be abolished, which is around 6-8 per cent on total consideration.”

L.Badri Narayanan, Partner at a Delhi-based law firm, Lakshmikumaran & Sridharan, was of the opinion that, “the complex issues of joint development, slum rehabilitation schemes, transfer of development rights, free supplies, cancellation cases among others continue to make GST a challenge for the sector”.

The property sector was severely hit after the implementation of GST, but now market participants feel it has somewhat revived.

“There is a slight improvement in the market, but not up to the mark and it is very difficult to say that the real estate market is going to improve in the near future…2-3 years,” Singh said.

Despite all the shortcomings, developers believe that in the long run the disruptive tax regime would be positive for the market, with the previously unorganised segment now getting streamlined. GST deserves its share of credit, along with RERA.

The most notable positive impact of GST on the sector actually has been the “non-implementation of GST” on ready-to-move-in properties, keeping it tax-free and in turn leading to rise in sales.

“The new tax system has brought in transparency to the end-user, therefore people have accepted it whole-heartedly,” said Elan Group’s Director, Ravish Kapoor, adding that it has brought a paradigm shift in the overall realty fraternity by bringing in accountability in all transactions.

Anshuman Magazine, Chairman, India and South East Asia, CBRE, said as the sector gets more streamlined due to GST and other reforms like RERA, the investor and consumer sentiment should further boost the ecosystem in future.

Even as various formulas are being worked out by the opposition at the national level for taking on the Bharatiya Janata Party (BJP) in 2019, including forming alliances which may not be the same in every state, the first test as to whether such khichdi or hodge-podge groups can be politically effective will be the lifespan of the Janata Dal (Secular)-Congress government in Karnataka.

If it fails to survive at least till the next general election, then all the hopes of the non-BJP parties coming together against the BJP will evaporate. It is unfortunate for those planning a confrontation with the BJP that the current signs about the longevity of the H.D. Kumaraswamy government in Karnataka are not very reassuring.

Having been uncharacteristically magnanimous about letting Kumaraswamy of the JD-S become the Chief Minister although he is the junior partner in the coalition, the Congress now appears unable to accept the reality of its No. 2 position despite winning 78 seats in the 224-member assembly to the JD-S’s 37.

Hence, the current differences between the two parties over the presentation of a full budget, which is what the Chief Minister wants, apparently to leave his personal stamp on the fiscal policy. The Congress, however, objects to it since the former Chief Minister, Siddaramaiah, had presented the state’s budget earlier and evidently doesn’t want his plans to be summarily brushed aside.

It is also no secret that relations between the present and former chief ministers have not been cordial ever since Siddaramaiah crossed over from the JD-S to the Congress on realising that Kumaraswamy was the former Prime Minister H.D. Deve Gowda’s choice as his successor in the party.

Since there have been tussles between the two parties over ministerial berths as well, it is not surprising that Bengaluru was rife not long ago with rumours about the BJP toppling the Kumaraswamy government. It goes without saying that any impression about the instability of the ruling alliance will enable the BJP to mock the national opposition’s efforts to combine against it.

As it is, ever since the Janata Party’s collapse in the late 1970s, the idea has gained ground about the inherent fragility of coalitions at the national level although they have been quite successful in states like Kerala and earlier in West Bengal. In New Delhi, however, neither the Janata Party of Morarji Desai, Charan Singh and Jagjivan Ram of 1977, nor the Janata Dal of V.P. Singh, Devi Lal and Chandrashekhar of 1989, could last for any length of time

The machinations of the Congress were one reason for the short lifespan of these combines. It was the same in the 1990s when the Congress brought down the H.D. Deve Gowda government at the Centre and paved the way after I.K. Gujral’s brief interregnum for the BJP to come to power.

Perhaps the time has come for the Congress to show that it has got over its self-perception of being the natural party of governance in Lutyens Delhi and let others also have their days in the sun. Whether or not such a change in the party’s outlook has taken place will become clear by its role in Karnataka.

It is a test of leadership not only for the Congress as an organisation, but also for Rahul Gandhi, who has to show that he is not like his grandmother, Indira, or uncle, Sanjay, who conspired to seal the Janata Party’s fate in 1979, or like his father, Rajiv, who pulled the rug from under V.P. Singh’s feet with Chandrashekhar’s help in 1990.

Since by his own admission, he aspires to be the Prime Minister if the Congress wins a sizeable number of seats, he has first to show his capability of controlling his notoriously fractious party and then of accommodating his allies. As far as groupism is concerned, Karnataka presents less of a challenge to the Congress president than, say, Madhya Pradesh where the number of heavyweights in the party is larger — Kamal Nath, Digvijay Singh, Jyotiraditya Scindia — but Rahul’s success or failure in Karnataka will send the required message to the other states as well.

If he can ensure a measure of calm in Karnataka, it will signal his arrival as a person who has it in him to lead the 133-year-old Grand Old Party although it is known to be well beyond its prime at the moment. Unlike Madhya Pradesh or Rajasthan, where the Congress has been out of power for a decade and a half and, therefore, is in a chastened frame of mind, Karnataka is different because it was in power on its own till recently and is now in office with an ally. The attitudes and ambitions of the local Congress leaders are more assertive as a result.

The challenge for Rahul, therefore, will be greater than what he has faced so far. Moreover, it will serve no worthwhile purpose for him to depend on Sonia Gandhi to make any of the restive members fall in line. He has to demonstrate that he alone is at the helm. However, Rahul’s task will be more difficult than either what Sonia Gandhi experienced when the Congress unexpectedly won the 2004 election or what Rajiv Gandhi faced when he became the Prime Minister after Indira’s assassination in 1984.