Demonetisation, RERA and GST - impact on real estate

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The real estate sector has faced several obstacles over the past few months in the light of the implementation of demonetization, RERA and GST. Each of these reforms brought about an added dimension of change to the sector, and with it a new set of challenges to take on.

Demonetization

The demonetization move was received with a lot of panic, causing people to be wary of spending, leading to a decline in demand for housing. Property registrations saw a decrease of up to 40%, giving rise to an air of fear among developers. This led to them putting many projects on hold to avert losses and risk.

Regular sale of homes had taken a hit with several thousands of properties across the country having seen a sudden stoppage in sales. The effects of demonetization on the real estate sector have varied from place to place but with time, the demand for housing saw a gradual increase, especially in the affordable housing segment, a large chunk of which is comprised of small sized flats. Affordable housing is being given a healthy push by the government and there are also a few tax benefits that have been introduced.

RERA

The Real Estate Regulation (and Development) Act, 2016 (RERA) came into effect on May 1, 2017. It aims to boost investments in the real estate sector and create a more transparent environment for property buyers by increasing the accountability of builders. There are three groups of people who are the main stakeholders in the real estate sector - builders, brokers and buyers. Let us take a look at how each of these groups has been impacted:

Builders: Builders are required to register all properties above 500 square meters or those having eight units in order to facilitate regulation. RERA also requires builders to do away with terms like built up area. Property is now to be sold on the basis of carpet area, which has been clearly defined in the act. Builders are also liable for structural defects for up to 5 years from handing over possession to buyers.

Any new projects will need to be licensed and approved by RERA before they can commence development, leading to a decrease in the approval of new projects.

Brokers: Real estate brokerage in India has been relatively unorganized. In accordance with RERA, real estate brokers will have to register themselves and acquire a license. They are also required to provide complete and correct information to buyers and perpetuation of any false information on their part can result in heavy penalties.

These regulations will serve to weed out brokers who engage in malpractices to win the confidence of buyers.

Buyers: Buyers now enjoy more power as the new regulations have laid down the foundation for a more transparent buying process. Developers are now going to be held accountable for their actions and can face severe penalties for deviating from RERA requirements. Each state is going to have regulatory bodies as well where disputes between buyers and builders are to be resolved within a period of 60 days.

In order to combat the issue of late delivery of property, RERA has also established regulations where the developer has to pay interest to buyers in the event of any delay in the transfer of possession.

The real estate sector is set to greatly benefit from RERA. It will go a long way in increasing buyers’ trust in the sector and will serve to encourage foreign investment as well. RERA has brought forth a number of other changes which will transform the face of real estate in India. For more information on RERA, take a look at some of our other articles.

GST

Developers across the nation have been gearing up for the changes that GST would bring along. The GST is still in its initial stages and there are many processes that are yet to be streamlined. However, its effects are already being felt in a major way.

People are mainly adapting the new tax structure. Under the previous tax regime, there were multiple taxes levied on various construction materials including paid customs duty, central sales tax, excise duty and many others. The GST subsumes many of these taxes which can improve the profit margins of developers.

There are a number of materials for construction which come under the 28% tax slab. This will lead to an increase in prices of materials like marble, granite, tiles and ceramics among others. This might in turn lead to increase in prices of construction projects.

Furthermore, residential projects which are under construction will attract a tax of 12%. In scenarios where the majority of construction has been completed before the implementation of GST, there will be minimal credit input available to the developer. Stamp duty, however is still applicable irrespective of whether a project is in the construction or completion phase.

Ready-to-move-in properties might be seen in favorable light by buyers, as they are not affected by GST, although such properties will be priced at a slightly higher rate as they do not see the benefit of input tax credits. Go through some of our other articles for more information on the intricacies of GST.

When it comes to resale, properties that have occupation certificates do not come under the ambit of GST. However, buyers of under construction resale property will incur GST rates. Stamp duty and registration charges also apply in these situations but they vary from state to state.

In spite of all the uncertainty around the GST, the reformation of the complex tax structure stands to bring increased transparency to the real estate sector and boost foreign investments.

The economy is still in a transitory stage when it comes to RERA and GST and there are many developments that will happen over time as the new regulations get further streamlined. Industry veterans hold a positive stance towards these changes and expect to see tremendous long term benefits out of them.

Demonetisation, RERA and GST - impact on real estate

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