Impact on Goods and Service Tax (GST) in Housing Finance

Abstract:
The article reveals as a home purchaser, it pays to recognize what the usage of GST may bode
at home costs pushing ahead. In the event that you avoided the whole article, here are all the key bits
of knowledge more or less: With GST, there ought to be an once-off increment in property costs in all
cases . While engineers may not charge home purchasers for GST, they could exchange the expenses
certainly by means of the deal cost. The general cost increment for new private properties could be
insignificantly lower than that for new plug properties . The auxiliary home market ought to see a
thump on impact in costs. Outfitted with this learning and our home advance correlation apparatus,
the general population can settle on a superior choice on when to buy home.

Keywords: goods and services tax, housing loan, etc

INTRODUCTION:
 GST stands for Goods and Service Tax. It is a kind of indirect tax imposed on
manufacturing, sale and usage of goods and services. Goods and Service Tax is applied on goods and
services at a national level with a purpose of achieving overall economic growth. GST is particularly
designed to replace the indirect taxes imposed on goods and services by the Centre and States and also
by both the government.

Goods and Service Tax can be defined as a kind of Value Added Tax (VAT) imposed by on
various goods and services by different countries. The tax charged on goods and services may differ
from country to country. Goods and service tax is imposed to collect revenues for the government.
This tax is paid by the consumers of goods and services and collected and forwarded to the
government by the business entities.

Objectives of the present study

To describe the concept of GST in India.

To analyze the Socio - economic background of the respondents.
To identify the impact of GST of housing finance corporations in India.

THEORETICAL ASPECTS

Goods and Service Tax in India:

In India, the Goods and Service Tax Bill was officially introduced in 2014 as The Constitution
(One Hundred and Twenty-Second Amendment) Bill, 2014. The GST Bill in India proposes the
implementation of nationwide Value Added Tax on sale, manufacturing and the use of different goods
and services. The Goods and Service Tax Act is expected to be implemented in India from April,
2016.

Current Taxation System:

GST is a kind of indirect tax. Currently, Indian consumers have to pay indirect tax on goods
and services such as Value Added Tax, Service Tax, Excise Duty, Customs Duty, etc. Under the
present system, each state has a right to levy their own tax on the goods coming into their dominion
for sale and consumption, while the Centre levies taxes on manufacture of the goods. All these direct
taxes levied on the traders are passed down to the consumer. The taxes levied by the State and Central
Governments is given in the table below:

Central Government State Government Local Administration

 Income Tax Sales Tax Property Tax
Excise Duty or Central VAT Value Added Tax
Service Tax Entertainment Tax
Customs Duty
Road Toll

Central Sales Tax Professional Tax

Stamp Duty
Luxury Tax
Octroi Duty
Capital Gains Tax
Entry tax

How GST Works:

GST proposes to abolish the varying levels of taxation between States, and consider the
country as a single whole organism when it comes to taxes on goods and services instead of as a
segmented creature. All the sundry taxes will be clubbed into just two levels Central GST and State
GST. What a trader will essentially be able to do is claim a refund on the taxes already paid at
different stages of value addition. The consumer who buys the product will have to pay only the GST
charged by the last dealer in the supply chain, as everyone else would have the opportunity to set-off
the taxes paid at the previous stages. If we take the example above under the GST system, the Central
value added act on manufacturing the dress and the taxes paid on dyes and buttons can be offset at
each level, thereby considerably reducing the total taxes paid.

GST will also prevent the multiple taxation occurring on certain goods, and ensure
transparency with regards to the rate of taxation and the total amount that goes to the government as
taxes on a product. Currently, a consumer is not aware of the total amount of taxes s/he pays for a
product, apart from VAT which is mentioned on the bill.

Significance of GST:

This is a federal law, which means that the states will no longer have the right to make new
laws on taxation towards goods and services.

It simplifies the tax system and makes it easier to understand as well as cheaper to implement
at various levels.

Tax evasion at various stages will be eliminated as tax offsets can be collected only if taxes
have been paid originally. You will also be able to buy raw materials or constituent materials
for production only from those who have paid taxes, in order to claim benefits.

It will be very cheaper to buy input goods and services for production from other states.
 The current supply and distribution chain system may undergo a change with a change in
present taxation system that does away with excise and customs duties.

The consumer will get the end-product at cheaper rates because of elimination of multiple
taxes and the tax cascade.

As of now, petroleum and petroleum products have been kept out of the GST regime until
further notice.

Sale of newspapers and advertisements are also likely to fall under the GST regime, allowing
the government to increase its social of revenue considerably.

While there will be central GST and state GST, the tax applicable on goods and services being
exported and imported between states in India would come under an Integrated GST (GST)
system in order to avoid conflict of dominion.

Disadvantages of GST:

GST is not good news for all sectors, though. In the current system, many products are
exempted from taxation. The GST proposes to have minimal exemption list. Currently, higher
taxes are levied on fewer items, but with GST, lower taxes will be levied on almost all items.

GST is not applicable on liquor for human consumption. So alcohol rates will not get any
advantage of GST.

Stamp duty will not fall under the GST regime and will continue to be imposed by the
respective states.

The Impact:

It is expected that the creation of the Goods and Service Tax act and its implementation will
have a great impact on various aspects of business in India by changing the traditional pattern of
pricing the products and services.

The Goods and Service Act will also have a great impact on the tax system in India by
reducing the unfavorable effect of tax on the cost of goods and services. GST is expected to change
the whole indirect tax system by impacting the tax structure, tax computation, credit utilization and
tax frequency. It will also help in supply chain optimization.
 As per the government notification, the Goods and Service Tax will be effective in India from
April, 2016. The originators of the Goods and Service Tax believe that the implementation of this act
would make the tax procedure more transparent, fair and efficient.

Thus, the introduction of Goods and Services Tax or The Constitution (One Hundred and
Twenty-Second Amendment) Bill, 2014 is a significant move taken the Indian Government to reform
taxation in India. It will help in creating a single national market by merging several Central and State
taxes under a one single tax procedure. No doubt, the implementation of GST will take time, but it is
likely to create more employment opportunities and economic inclusion.

Advantages of GST in real estate industry:

Timely delivery of flats: Developers often make false promises about the completion date of
the project, but hardly ever deliver. As per the bill, strict regulations will be enforced on
builders to ensure that construction runs on time and flats are delivered on schedule to the
buyer. If the builder is not able to deliver the flats on time, that have to refund the purchaser
with interest.
Furnishing of accurate project details: In the construction stage, builders promote their
projects defining the various amenities and features that will be part of the project. But not
everything goes as per plan, with several features missing. As per this bill, there can't be any
changes in the plan. And if a builder is found guilty of this, he/she will be penalized 10% of
the projects costs or face jail time of up to three years.
Specifying carpet area: Generally, builders sell flats on the basis of built-in area, which
includes a common passage area, stairs and other spaces which are 20-30% more than the
actual flats area. But, not all customers are aware of the concept of carpet area. With this bill
it will become mandatory to declare the actual carpet area.
All clearances are mandatory before beginning a project: Builders often attract buyers
with huge discounts and pre-launch offers. And, the buyer, enticed by the offers, does not
bother about the clearance. But, due to delays in getting clearance, the buyer does not get the
flat on time. This bill ensures that developers get all the clearances before selling flats.
Each project should have a separate bank account: Developers raise funds through pre-
launch offers and use them to purchase some other land or invest it in other projects. This bill
will make it compulsory that a separate bank account should be maintained for each and every
project. Each transaction will have to be recorded, and diversion to another project will not be
entertained.
After sales service: As per an interesting clause in the bill, if the buyer finds any structural
deficiency in the development of the building, the buyer can contact the builder for after sales
 service. But, the buyer should approach the builder within a year of purchase to rectify such
defects without further charges.
Disadvantages of GST in real estate industry:
Past real estate projects not covered: Only new projects are covered by the bill. Projects
that are ongoing, completed or stuck due to clearance or financial issues, dont come under
this. Hence, many buyers will not be benefitted by it.
Delay from government agencies: There can be delays caused by the government, which
sometimes takes a lot of time to clear a project. It is up to government bodies to follow strict
time frames to approve projects, so that developers can launch, complete and deliver them on
time without any delay.
No compulsory regulation for projects less than 1000 square meter: Registration with the
regulator will not be mandatory for projects less than 1000 square meter. So, small developers
will not be covered and bound to register.
New project launches expected to be delayed: Because a project will not be allowed to
launch without the requisite clearances from the government (which generally takes two to
three years), projects will automatically get delayed. All said, the real estate bill promises
complete justice, by ensuring buyers get their dream homes on time and at an affordable
price.
While the government has been projecting its strong commitment to restore the economy on
its growth track, its political rivals are vehemently highlighting the long-lasting the evil effects of
demonetisation. The political turmoil has also led to slow down in the implementation of GST, the
largest reform in the indirect tax space. Considering this rough run up, there are high expectations of
the government announcing various feel-good factors in the Budget 2017.

Tax Scheme on Residential Property The Similarities

In comparing both tax schemes, we have to first identify their similarities. One similarity
between GST and the existing Sales Tax scheme is that no taxes are charged or will be charged to the
consumer on the purchase of a home / residential property. For GST, residential properties fall under
the Exempt Rated basket of goods. However, during the creation of the final product (also known as
the input stage in tax parlance), under both tax schemes, developers would incur taxes during
procurement of their inputs and materials. And this is where the differences start to become apparent
between both tax schemes. The tax rate for inputs and materials vary between GST and Sales Tax.
Sales Tax VS GST for Residential Properties The Differences

Based on the Sales Tax Act of 1972, basic building materials such as bricks, cement and floor
tiles fall inside First Schedule Goods, in which all the goods in this category will not be subjected to
sales tax. Meanwhile, other building materials fall inside Second Schedule Goods, in which all the
goods in this category will only be charged sales tax of 5%.

Under the new GST implementation, all building materials and services (E.g. Contractors,
engineers) will be subject to the coverage of GST with a standard rate of 6%. This will invariably
raise the production cost for developers.

Before and After the implementation of GST A Comparison

The tables below show a comparison between the cost of a new property before and after
GST. Certain taxes and costs leading up to the sale to the final consumer have been simplified for this
purpose. Also, an assumption is made that developers are able to transfer 100% of all incurred tax
costs over to the consumer via the sale price.

Table 1

Residential and Commercial Properties - Current tax scheme

Final Cost Profit Sale Total
After Tax Margi Sales s Tax Collecte
Supply Chain Cost Claims n Price Tax Collected d
Construction Materials
First Schedule 10000 12000
Goods 0 100000 20% 0 0% 0 120000
Second
Schedule 10000 12000
Goods 0 100000 20% 0 5% 6000 126000
246000
Construction and Development
Construction 24600 36900
Contractor 0 246000 50% 0 0% 0 369000
36900 55350
Developer 0 369000 50% 0 0% 0 553500
Final Cost
to
Consumer 553500

ANALYSIS AND INTERPRETATION:

Socio - Economic Background of the Respondents:

Table no. describes the socio - economic background of the respondents for the
present study. Out of 150 respondents who were taken for the study: it has been identified
that most (81%) of the respondent are male, 45% of housing finance under 26 to 50 years of
age category, most (68%) of the respondents are up to school Level, (46%) of the respondents
are businessman and the annual income of 44% of the respondents having annual income is
in above Rs.2,50,000 category and (64%) of the respondents are belong to nuclear family
Table 2: Socio - Economic Background of the Respondents

Factors Number Of Respondents Percentage

Male 122 81
Female 28 19

Up to 25 34 9
26 to 50 66 45
Above 50 60 26

Up to School Level 102 68

Graduate 32 21
House wife 16 11

Business 69 46
Employee 45 30
Professionals 36 24

Up to Rs.1,00,000 21 14
Rs.1,00,001 to Rs.2,50,000 63 42
Above Rs.2,50,000 66 44

Nuclear Family 54 36
Joint Family 96 64

FACTOR ANALYSIS:
FACTOR INFLUENCING THE LEVEL OF SATISFACTION OF GST ON HOUSING
FINANCE:

Factor analysis is a very useful method for reducing data complexity by reducing the
number of variables being studied. It was used to identify the level of satisfaction on housing
finance. To determine the appropriateness of applying the factor analysis, the KMO and
Bartletts test measures were computed, and the results are presented in the table 6. The
KMO measure of sampling adequacy was calculated by using the correlation test, to check
whether the variables in the sample were adequate to correlate. The general rule of thumb
 is that the KMO value should be greater than 0.65 for a satisfactory factor analysis to
proceed. By observing the result in the table 5, it can be observed that the KMO value is
0.000. The Bartletts test of sphericity was also found to be significant at the 1% level,
providing evidence of the presence of the relationship between the variables and it made a
sense to continue with the factor analysis.

Table 3 Correlation Matrix

Correlation 1 2 3 4 5
Increase of property price 1.000 .066 -.001 -.002 .052
Necessity of bill .066 1.000 -.013 .143 .043
Price for new residential property -.001 -.013 1.000 .096 .013
Effect of price on secondary market -.002 .143 .096 1.000 -.058
After sale services .052 .043 .013 -.058 1.000
Sig. (1-tailed) 1 2 3 4 5
Increase of property price .150 .492 .489 .208
Necessity of bill .150 .420 .012 .247
Price for new residential property .492 .420 .065 .417
Effect of price on secondary market .489 .012 .065 .182
After sale services .208 .247 .417 .182
a. Determinant = .050

Total Variance Explained:

Table 4 shows the eigen values, percentage of variance, cumulative and the total
variance of the variables identified for the study. The result show that the eigen values of the
first three factors alone is greater than 1, indicating that these factor alone were appropriate
for inclusion in the analysis. These five factors together accounted for nearly 65% of the total
variables. These are quite good as we were able to economize on the number of variables
(from 5 variables to 3 factors).
Table 4
Total Variance Explained
Component Initial Eigenvalues Extraction Sums of Squared Rotation Sums of Squared
Loadings Loadings
Total % of Cumulative Total % of Cumulative Total % of Cumulative
Variance % Variance % Variance %
1 1.175 23.495 23.495 1.175 23.495 23.495 1.151 23.014 23.014
2 1.088 21.767 45.262 1.088 21.767 45.262 1.081 21.626 44.640
3 1.003 20.061 65.323 1.003 20.061 65.323 1.034 20.683 65.323
4 .939 18.784 84.107
5 .795 15.893 100.000
Extraction Method: Principal Component Analysis.

Table 5

Rotated Component Matrix

Component
1 2 3
Increase in property price .205 .608 -.125
Necessity of bill .746 .252 -.184
Price for new residential property .036 .039 .932
Effect of price in secondary market .722 -.217 .295
After sale services -.172 .774 .168
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 6 iterations.
Table 6

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .659
Approx. Chi-Square .012
Bartlett's Test of Sphericity df 10
Sig. .000
Result:
The purpose of factor analysis is the reduction of data. The perception of the
customers regarding factors that affect the level of satisfaction in housing finance was
measured using 5 variables, which were reduced to 3 underlying factors. These three factors
are services, benefits and value of the property under GST of housing finance. The present
study has revealed that these three factors affect the level of satisfaction in housing finance.
Conclusion

As a home buyer, it pays to know what the implementation of GST might bode for home
prices moving forward. If you skipped the entire article, here are all the key insights in a nutshell:

1. With GST, there should be a once-off increase in property prices across the board
2. While developers may not bill home buyers for GST, they could transfer the costs implicitly
via the sale price
 3. The overall price increase for new residential properties could be marginally lower than that
for new commercial properties
4. The secondary home market should see a knock on effect in prices

Armed with this knowledge and our home loan comparison tool, the people can make a better
decision on when to purchase home.

Reference:

S. Abdul Lathif and Dr. U. Syed Aktharsha, A Study on Role of Behavioural Finance in Active Management and
Investor's Emotions. International Journal of Management, 6(1), 2015, pp. 97102.
Dr. N. Nagaraja and Srinivas K.T, Venture Capital Finance. International Journal of Advanced Research
Management, 4(1), 2014, pp. 0110.
Erwin Mlecnik, HenkVisscher and Anke van Hal, Barriers and opportunities for labels for highly energy-efficient
houses, Journal of Energy Policy, 38(8), 2010, 4592-4603.
www.thehindhu.com
www.wikipedia.com