Landmark Reform GST, Set to Change India's Tax Landscape

With the Lok Sabha clearing the four GST bills, India’s landmark tax reform, is expected to be rolled out for implementation from July 1, 2017. The GST Council, headed by Union Finance Minister Arun Jaitley, and comprising representatives from all states, is slated to meet in May this year to decide the rates that various goods and services will be charged in the new regime. The proposed destination-based tax will subsume the various indirect taxes currently levied by the central and state governments. Both the central and state governments will simultaneously levy GST across the value chain. The central government will levy and collect Central Goods and Services Tax (CGST), while state governments will levy and collect the State Goods and Services Tax (SGST) on transactions within a state.

While the industry has been anticipating this reform for some time, the passage of the bill means that all stakeholders need to ensure they have a clear and thorough understanding of the various rules, implications, compliances and requisite adjustments so that they can begin working under the new tax scheme

How is real estate covered under GST?

• The GST council has categorized renting of immovable property (including a commercial, industrial or residential complex for business or commerce, either wholly or partly) as supply of a service.
• It has also included construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly as a supply of a service.
• The Bill has identified lease of land and building, any lease, tenancy, easement and license to occupy land as a supply of a service.
• However, sale of land and completed buildings will be out of the purview of the GST.
• Similarly, input tax credit has not been allowed for contract services when supplied for construction of an immovable property or when goods or services or both are received for construction of an immovable property

Clarity is sought on the abatement for cost of land (currently 75% subject to conditions) which is applicable while calculating service tax for investing in an under-construction residential projects.

In the long run, the GST is likely to be positive for the real estate sector, with the warehousing segment set to be the biggest beneficiary of the reform. As the GST will make doing business in India tax neutral, irrespective of location, investment decisions for a warehousing operator will no longer be dictated by the comparative tax advantages of various states, thereby enabling them to make decisions based on supply chain dynamics.

To gauge the impact GST would have on India’s warehousing industry, CBRE recently conducted a survey among the leading warehousing space occupiers in the country. Survey respondents included leading corporates in sectors such as third party logistics (3PLs), e-commerce, engineering & manufacturing, fast moving consumer durables and non-durables, pharmaceuticals and retail. The respondents were a mix of domestic as well as corporates headquartered abroad.

The survey provided some interesting insights into the perspective of the sector to the GST. Unlike most reforms that tend to be met by resistance, our survey highlights the fact that most warehousing players view the implementation of GST as a positive move. As the warehousing segment moves towards a more systematic mode of operation, it is likely to witness the inflow of more institutional funding and formal sources of capital. As national players with larger warehouses emerge; deployment of capital in these fewer, better quality assets are likely to become easier. Numerous prominent private equity firms and regional developers have already conveyed their intentions to develop large modern warehousing across the country.

India can learn much from other countries both globally and in the region who have adopted a unified tax regime. In Asia, countries such as Indonesia, Thailand, Singapore and the Philippines adopted a GST during the 1980’s and 1990’s, creating an effective tax system with a comparatively lower cost of administration and collection. It has enabled countries such as Singapore to lower its corporate and personal income taxes, which in turn has encouraged more Foreign Direct Investment (FDI) and stimulated overall economic growth. While the theoretical positives of the GST are easy to understand, we believe that effective implementation of our country’s most significant tax reform in decades will be critical to the success of the GST.