GST Positive towards Real Estate Sector
The arrival of GST is supposedly a boon to the real estate industry. All raw material inputs like cements, steel, sand, bricks, wood, flooring, sanitary-ware, electrical materials will undergo a major change of getting organised as most of these vendors have been unorganised. The entire vendor eco system of the Realty sector will get reorganised after implementation of GST.
Real estate sector is major contributor to the Indian economy, as it is estimated to contribute almost 2-3% of the GDP of the economy. It also generates huge employment, in the lower end strata of the society. With the introduction of GST, it is expected to overhaul and usher transparent business practise within the industry at all levels.
There are 16 or more different State & Central indirect taxes levied for different goods which is used in the construction sector, like VAT, Service tax, excise duty, entry tax, octroi etc. on the goods procured from the Vendors. All these are subsumed by the GST, hence the Contractors / Developers possibly could end up with additional profits overall on their costing due to savings in their purchases due to the input credit system.
This should result in passing on the benefits to the customers by way of lowering the prices, but we do not know if this would be implemented by the Developers, as pricing of real estate is driven by market forces, than on costing principles. However, if the same is not passed on by reducing the price, the overall impact to the customer could be higher as the incidence of GST would be higher than the service tax plus VAT that was being levied in the past.
Also it is to be noted that, GST is not applicable on completed projects (where the occupancy/ completion certificate has been obtained from the concerned government department)
There could be many projects, which would require transition from the tax regime of VAT & Service tax and other indirect tax laws onto GST. But, it looks that the Act has not indicated any provisions for this transition. This seems a pain point for the industry currently.
GST rate on Real Estate
The Real estate sector has been under heavy taxes in many ways due to the impact of multiple taxes on various products which go into completion of an apartment or a villa.
But with the implementation of GST, it has simplified the rate into a single rate of 12%, due to involvement of combination of products and labour (which combined VAT & Service tax, earlier).
As such, presently, the sale of land and buildings (fixed assets) has been kept out of the ambit of GST but it is likely to be taxed within in the near future. Construction of land and building will benefit from the rates declared for all major materials like cement, sand, bricks, and steel, etc. under the GST.
The impact on RERA registered Real Estate brokers/ consultants and agents are at 18% versus 15% earlier but however the total taxable turnover threshold limit has been increased to 20 lakhs.
The impact of GST on real estate sector is expected to be neutral, and overall more helpful to the Developers, and relatively less helpful to the Customers. The biggest advantage is that it brings in total transparency in costing & tracing every supplier of material who can be held accountable and responsible in future.
Author is D. Ravichandra Babu, a Chartered Accountant and an Investment banker. He specialises in the Realty sector since last 20 years, and also specialises in other verticals like Media & Entertainment, Non-conventional energy, and few other sectors, and mentors a few startups. Views expressed herein are his personal views
WHAT ARE REVENUE RECORDS & IMPORTANCE OF THE SAME
Historically India has been an agrarian economy with agriculture as the main activity. The Revenue Department used to collect taxes from the farmers and issue the following documents to them, this system continues till this day:
Patta is a land revenue record which establishes the title/ ownership of land. The Patta Register is maintained at Taluk office and contains ownership details of all Land holdings. Patta was issued to the person holding possession of the land traditionally as there were no title records by the government for non-urban land that was never transacted. Patta apart from being a proof of possession is also accepted as a title document in the absence of registered deeds (documents) for a property.
The specific information that Chitta extract contains include Village, Taluk, District, Land Owner’s name with Father’s name, Patta number, Survey Number with sub-division details. Read more about book of dead online slot
Adangal record is the extract from A- Register, maintained at VAO office. It clearly stated the boundaries and the access to the property too.
The above two documents also bear the type of land whether puncture (not put to any use) or the number of crops being cultivated annually & the type of crop.
An “A register” is a record of the land held at the VAO’s office (Village Adminstrative Officer). It has details on the property such as it’s classification, tax assessment, owner’s name, etc.
Very meagre amount is collected from agriculture land as tax which should be paid on yearly basis and this in Tamilnadu is called kist. Receipts are issued for the same.
Field Measurement Book (F.M.B) In FMB’s the individual survey number maps are maintained at a scale of 1:1000 or 1:2000. Each survey number is divided into several sub divisions. Each sub division is owned by an owner. The FMB’s also depicts the dimensions of each field boundaries and the sub divisions. It clearly demarcates the property from the neighbour’s and also shows the access and government lands too. These drawings are made from government surveys done in the past
“Poram” means outside, and “boke” means revenue record. Hence the word, poramboke, can be defined as land which lies outside revenue records. By such a definition, any piece of land can be classified either as a privately-owned Patta land, Government Poramboke land or Grama Natham land. There are also other types of Poramboke lands and government lands which are more technical in land acquisition & land development, more for aggregators.
SALE DEED REGISTRATION
Once stamp duty is paid the document should be registered under the Indian Registration Act. This is done under the jurisdiction of the Sub-Registrar under whose local jurisdiction the property is situated. The basic purpose of registration of documents is to record execution of document. Unless the deeds are registered in the buyer’s name in the government records, the buyer does not become the official owner of the Property. An original copy of the registration is kept with the Registrar which can be referred to in case of a dispute. A registered sale deed on which stamp duty has been paid gives title to a buyer making him the owner.
Adverse possession is a doctrine under which a person in possession of land owned by someone else may acquire valid title to it, so long as certain common law requirements are met, and the adverse possessor is in possession for a sufficient period of time, as defined by a statute of limitations. This in India is a period of 13 years & undisputed and uninterrupted possession of a property should be proved by documentation to claim ownership under this act.
Possession of the property is equally important as title of the property. In fact, some lawyers argue that possession is 9 out of 10 points in law in a legal dispute.
Another aspect about lands that have no clear title records are that the possession holder can enjoy the property (like poromboke land) but when it comes to sell, its not possible to convey title.
After registering the sale deed (document of title) and transferring revenue documents like patta , chitta, adangal (traditionally a document of possession) a property owner should check the EC (Encumbrance Certificate issued by the SRO – Sub Registrar’s office) at least annually to track any malpractice & also should have someone visiting the property at regular intervals to safe guard his asset.
The author of this article is Mr. G A Albert Joseph who is a director in Chattels Realty Consultants Pvt Ltd. He is into Land acquisition FOR Industries & Developers since 1995. He has acquired land of over 150 Acres. In the year 1997 he has developed residential layout of the tune of 140 acres and from 2004 onwards done land transactions with India’s leading developers like the Brigade Group, Mantri developers, Sattva Salarpuria, Adroit Urban and more. Mr Amit Damodar Chugh (President NAR India – CREAA Chennai 2015-16) has contributed to this article. They jointly own Home First Chennai a property broking firms that leases and sells commercial and residential property in Chennai
SAFETY AND SECURITY OF LAND -ENCROACHMENT & ITS SOLUTIONS
WHY BUY LAND
Real Estate is the best asset class for the highest returns & Land yields the highest return in Real Estate. Land cannot be produced & just a fraction of the Earth is Land! While LAND appreciates, Building depreciates! People buy land because the appreciation in Land investments will out beat rental returns plus appreciation on commercial properties over a long term period.
Is it so easy to make money in land? Not really, “more the profit more the risk“, while we spend money to buy property but we hesitate to spend peanuts on protecting the same. Land can be encroached & if not attended to on an urgent & immediate basis, it cannot be recovered even through the court.
WHO CAN ENCROACH
- If there is no boundary wall or fencing then the adjoining land lord can be the one to encroach, perhaps if not fully, at least in bits
- When a land is unattended to for unusually long periods of time & the value is constantly appreciating, local people and goondas who will not just occupy the land but can also create fake sale deed/ documents to create litigation on the property. This ensures that their name will appear on the EC during sale of the property & the prospective buyer will get scared and they can demand some lump sum money will be paid from the landlord
- If periodic land visits and fencing are missing from the land lord then slowly someone will enter and put one hut to establish possession of the land and try to pay land tax in his name
Local goons will support him to get their extra share (money)
How to safe guard your estate (Land):
“Prevention is better than cure”
- Regular monthly visits to your lands are advised to ensure that they are safe. There are agencies who offer this land monitoring service. Alternatively, the broker or property consultant who bought you the land, if local from the area can check on your property and send you pictures/ photos on a monthly basis.
- Avoid having a watchman staying permanently at the site, he could pose potential problems in future, it is advisable to change a watchman regularly. Do ensure that the property address is not used as a permanent address for the watchman’s identity proof.
- Patta is to be transferred to your name immediately after the registration of sale deed. Patta is a revenue record and is a proof of possession.
- The Revenue department also issues documents called Chitta & Adangal which specify the boundaries of your property & also details what is on the land, including the kind of cultivation if any.
- Land tax should be paid annually, in Chennai it is referred to as kist.
- Some agricultural activity like planting trees or decorative plants will keep people away & as they will know that the land is being monitored.
- If it is a very prime land day and night security by a credible security agency is preferred.
Land encroachments are not very commonly reported in Tamilnadu as landowners try to resolve matters amicably. A land grabbing cell set up under the direction of Honorable Chief Minister Selvi J Jayalalitha registered lakhs of cases in just 3 months. With regard to our fast appreciating hard earned money, we should not be very relaxed because civil courts will take too longer time to resolve the cases some times which can go up to 30 year, so the purpose of the investment will not be met
Finally if a property is encroached up on, the affected party should approach the land grabbing cell (in all district Collector offices in TN) and file a criminal case on the encroacher. The second option is a compromise with the encroaching party to get the issue sorted out faster and more easily. The last option is the judiciary.
CONCLUSION: Definitely invest in land fearlessly. It is the most appreciating asset class. Just take sufficient precautions and care.
RERA has been a much awaited compliance statute for the ever burgeoning Real Estate industry. Hitherto, there were not much entry barriers to being a Developer and lot easier being a Realtor (Broker). This has over the years led to a lot of misgivings and shortcomings in the industry, while there has been a burgeoning growth despite these setbacks. These shortcomings have been more towards the Customers who took the brunt of them, and these were in terms of non-clarity on the area sold (carpet, plinth, and common area, etc.); Quality; Specifications – promised vs. delivered; Timely delivery, Legal process; Adherence to Statutory approvals. All this has led to the Customer being stonewalled into a corner, and the Government had to usher in the compliance statue in order to regulate the Developers and as well as the Brokers.
The RERA Act promises to protect the Customers and assures Accountability, Standards, Transparency, Customer-centric behaviour, and a Code of Conduct from the Developers and the Brokers alike. So, with the advent of RERA, the Customers are likely to benefit immensely in order to protect their hard earned monies being invested into Real estate, with the advent of RERA.
The penal provisions are quite stringent so that the Developers / Brokers do not evade any compliance.
The impact of all this will result in a major shake up in two fronts:
- There would be a reduction in the Land prices and also the product offerings immediately. The reduction in the product prices would be the result of the various projects which have been delayed due to various reasons ranging from depressed market conditions, to delays in the completion of the project by the Developer, to legal issues plaguing the projects, all of which have been brought under the ambit of RERA. This necessitates facing stiff penal provisions of RERA ranging from penal payments, interest and in certain extreme cases leading to arrest of the Developer / Broker. As such, the Developer is forced to take a hasty action of completing the project even it means selling at lower prices for the fear of facing the consequences of the provisions of RERA.
- The second and most important impact will be due to certain draconian provisions of RERA, like 70% of the receipts to be escrowed in a separate account, selling to be only on the basis of carpet area, no sales allowed till all approvals are in place, no forward looking advertisements or publicity about the project to be publicised, etc…to name a few, will result and/or force the exit of major percentage of Developers out of business (read: fly by night operators). I expect the percentage to be in the range of more than 60%.
- There will be standard measuring system amongst developers & projects in a micro- market. The total cost divided by the carpet area in square foot will create a standardized benchmarking system for the entire industry.
- The resultant effect would be that the remaining Developers would be very selective in their approach to the Project, and mostly inclined only towards Joint development rather than acquiring lands and develop them.
- This would create a certain amount of demand never seen before in the market, as there would be short supply of Units of various sizes and budgets. This stage would take about 2 years to reach, and the remaining Developers who sustained through these 2 years with all hardships will reap huge benefits from the market.
OVERALL: Good for Customer and very good for the Developers whosoever sustains through the next two years. It is expected to be a “Golden Period” for the Realty Industry. This analysis is only on the impact to the developer community & the impact on customers is discussed separately.
Author is D. Ravichandra Babu, a Chartered Accountant and an Investment banker. He specialises in the Realty sector since last 20 years, and also specialises in other verticals like Media & Entertainment, Non-conventional energy, and few other sectors, and mentors a few startups. Views expressed herein are his personal views.