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How will RERA and GST impact the realty sector?

Monday, April 10, 2017
By Dominic Rebello

The Real Estate sector contributes around 9% of India's GDP and is the second largest employer, after agriculture. With urbanisation being one of the major growth drivers for the sector, with around 10-12 million people moving to the cities annually, the real estate sector is likely to get a further boost from the government with plans like Housing for all by 2022, Pradhan Mantri Awas Yojana (PMAY), 100 smart cities etc.

The Government has paid more attention to the real sector than any other sector by announcing more than 20 supporting measures to revive real estate sector over the last two years including announcing the long awaited infrastructure status for affordable housing besides several tax concessions and exemptions. The Union Finance Minister during the budget 2017 said that the government plans to build 1 crore houses for the poor by 2019 along with the allocation of Rs 23,000 crore for Pradhan Mantri Awas Yojana to fulfill the government agenda of 'Housing for All” mission by 2022'.

“Anybody in India if asked about their aspiration to buy a house, their reply would always be a yes, young or old everybody wants to own a house of their own. This kind of consumer sentiment is only seen in the Indian real estate market where there is increase in sales despite a cash crunch. In India real estate is considered a form of investment with high returns on investment looking at it from a long term perspective,” said Amit Wadhwani, Director of Sai Estate Consultants when asked about the growth in the real estate sector.

“The Government has taken a number of steps to boost affordable housing in the country. In the recently concluded budget, the government granted infrastructure status to affordable housing which clearly shows its intention to achieve the target of Housing for All by 2022. The interest on subsidy scheme for the EWS, LIG and MIG group which the Govt has announced through the Pradhan Mantra Awas Yojana will definitely increase the demand for housing,” said Sanjay Jain, Group MD, Siddha Group.

“The announcement of ‘infrastructure status’ to the affordable housing sector, will serve as a significant step in achieving the government’s ‘Housing for All’ mission by 2022. To attract more investments and assure sustained growth of affordable housing in India, higher limit on external commercial borrowings, easy and dedicated access to institutional financing will give an advantage. Making it a priority, banks will lend more which will benefit more to buyers as well. Under the Pradhan Mantri Awas Yojana (PMAY), government’s decision to provide interest subvention of 3% and 4% for loans of up to Rs 12 lakh and Rs 9 lakh, respectively, will further boost demand in affordable housing segment,” said Manju Yagnik, Vice-Chairperson of Nahar Group.

The real estate sector, which till now was dis-organised, will be regulated with the Real Estate Regulation and Development Act 2016 (RERA) and GST. The purchaser will be more protected and greater transparency in the sector will be visible after the Government through legislation passed the RERA, which puts accountability on the developers in terms of financial disclosure, timely development of projects and maintaining good corporate governance practices. Home buyers confidence is now set to increase on the back of these sentiment-building measures of the government.

The GST is the single-biggest tax reform to be ever introduced in India. GST aims at eliminating the difference in indirect taxes applicable across various states. The real estate sector stands to benefit from the fact that GST would provide more clarity on tax-credits for RE transactions and allowance of input credit would reduce the price of properties. GST rate for the real estate sector is expected to be announced soon.

Realising this potential of the Real Estate Industry, Industry body Credai is mobilizing its member developers to join the ‘Housing for All’ mission and undertake affordable housing projects to achieve the Government’s vision. Credai also understands the value of robust processes and new policy reforms such as awarding infrastructure status to affordable housing, RERA and GST for unlocking the full potential of the sector, as an industry as well as an investment option. Getamber Anand, President, CREDAI, said, the real estate sector has seen its share of ups and downs in the past two years. With RERA, GST and Demonetisation, 2017 is marked as one of the most crucial years for the sector. “Currently, the sector which employs around 5 crore people directly or indirectly, is likely to go upto 20 crore, which is around one fifth of the total population.

According to CARE Ratings, in the residential real estate sector, post-introduction of Real Estate (Regulation and Development) Act (RERA) it is on the path to transformation, especially for the residential real estate segment. Some of the new regulations under RERA include disallowing the common practice among many developers of pre-launching projects without getting requisite approvals from the local authorities, making project registration mandatory with the regulator, and developers will have to disclose approval status, project layout and timeframe for completion to the regulator as well as customers. Additionally, in order to curb diversion of funds the developer will now have to deposit 70% of the project funds in a separate account which can only be used for the earmarked project. The Act also restricts developers from changing plans post approvals without the consent of the buyers further empowering the buyers.

The sector is expected to witness large scale consolidation. Smaller developers would find it difficult to meet their cash flow requirements due to prohibition on pre-sales until a project is registered post approval with the regulatory authority. This would require the small developers to merge or tie-up with large developers and then co-develop properties. The implementation of RERA may entail initial hiccups across the states and hence the more established and bigger developers would be at an advantageous position compared to the small and marginal developers when it comes to adhering to regulations, Care noted.

Explaining the benefits of RERA, Yagnik said, “The bill is expected to infuse accountability and confidence among the buyers which will make the sector healthier for foreign as well as domestic investors. The organized sector will only grow from here with stronger foundations forthcoming with the implementation of the RERA Act. RERA will ensure that the home buyers are adequately protected and that promoters and developers abide by the rules and regulations. The government passed the RERA (Real Estate Regulation and Development Act 2016) and the Benami Transactions Act which, along with the demonetization, will go a long way in bringing in transparency into the sector. The real benefits would mean being assured of a dedicated governing body, timely project completion, and complete information on the project and amenities promised.

“RERA, when gets functional will have a significant impact on the real estate sector. Initially in the first 6-12 months, there would be some confusion, but in the long run, it will definitely be beneficial. It will bring in much-needed transparency and will also establish a smooth mechanism in the processes going forward. The ACT will also try to protect the interest of consumers ensuring speedy redressal of disputes which will help gain confidence amongst the buyers. The implementation of GST for real estate is expected to reduce the cost of ownership for property buyers and will definitely help bring transparency in the buying process. However there is no clarity on GST on real estate, but it will surely help curb multiple taxes which the buyers need to pay in the current scenario, said Jain.

Echoing similar sentiments, Yagnik said, “We trust that the guidelines of RERA are set by the governments keeping in mind the mutual well-being of developers, consumers and all stakeholders to eventually benefit the real estate industry. We believe that the government and policy makers working in the interest of the industry. While GST will harmonize the state and central levies into a national sales tax. It will sebum a host of indirect taxes for developers as instead of paying multiple taxes and accesses. This uniform reform will give a singular tax structure. It will allow banks to invest in an important asset class thereby providing much needed boost to this segment. While there may be a rise in taxes at the final stage, but availability of credits on input taxes will not let the real burden of taxes increase. It will also help formalise transactions within the sector. Additionally, it will help check artificial inflation in prices.”

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