Could GST make your dream home a reality?

TomorrowMakers ™

Could GST make your dream home a reality?

28 September 2017
Potential home buyers could be in for a treat post the GST rollout. So, what does the one-tax regime bring with it?
 
 

IT executive Ashwin Chandra has been toying with the idea of buying a new house in Mumbai. He had checked out several under-construction projects, and even spoke to the developers, but was not entirely convinced if it would be a good idea to dive in now. Buying a property of his own will be a dream-come-true for Ashwin. But he is worried about a few other things. For starters, now that the Goods and Services Tax (GST) has been rolled out, is it wise to invest in a property after July? 

Ashwin’s dilemma is a reflection of what most homebuyers have been going through for some time. Demonetisation had set the property prices crashing. Now GST is touted as the biggest indirect tax reform in independent India. But nobody is certain whether this will be good for the real estate sector. Of course, more clarity will appear once the GST rollout is complete. There are certain indicators that foretell advantages for homebuyers. Yet, there are factors that can be worrisome. Let us see what the deciding factors could be.

Related: What does anti-profiteering mean in relation to GST?

GST at 12% 
GST on under construction and newly constructed properties that have not received the Certificate of Occupancy (OC) or completion certificate is 12%, which is much more than the 4.5% service tax that was previously applicable. An OC is a document that is issued after the completion of construction by a local government agency or planning authority and serves as proof of the building compliance and associated laws. 

Does this mean it will contribute to higher property prices? The answer is not a definitive ‘No’. This is because GST will subsume six existing taxes, including the likes of raw material and excise, entry tax and Value Added Tax (VAT), which is often beyond 12%.  However, ready-to-move-in properties are not under the ambit of GST. This has fuelled the belief that homebuyers will prefer to buy new properties.

A homebuyer, at present, must pay almost 11% in indirect taxes. For instance, VAT on the construction materials ranges from 12 to 14%. This will now be replaced with GST of 12%. The cumulative tax burden is borne by the customer, who pays a higher price for property. However, under GST, the cascading effect of half a dozen taxes is likely to reduce, ultimately benefitting customers. 

Related: With GST ready to roll out this July, what does it mean for you?

This benefit, however, may be offset with the hike in cement prices. Critical to any housing project, cement will fall under the 28% GST slab. This remains a big detriment for the housing sector, as it is likely to increase property prices. Moreover, material like ceramic tiles, paints, wall fittings etc. may become more expensive as they now carry a GST of 28%, as opposed to the previous tax rate of 20-25%.

ITC as incentive for under-construction projects
Homebuyers are also likely to benefit from the Input Tax Credit (ITC), another tax that the government has announced. Builder can claim a refund for excise duty and other central taxes paid on construction material. By government directive, they must pass on the benefits to consumers. For homebuyers, this means reduced prices of properties and instalments. Note that this benefit accrues only for under-construction properties, and developers feel that the benefits will be marginal for homebuyers.

What will not change?
Presently, homebuyers pay stamp duty to get their property registered. This is typically 6-8% of the price of the property, and varies from one state to another. This amount goes into the state government’s coffers. This probably explains why states shot down the proposal to replace stamp duty with GST. Post GST, there will be no change to this cost, and homebuyer will have to pay the stamp duty. 

Other government measures
It remains to be seen if the rollout of GST will benefit homebuyers. The real estate industry has been going through a churn since demonetisation, which set realty prices crashing. 

Soon after, the government introduced the Real Estate Regulatory (Regulation and Development) Act, which made it mandatory for builders to register with the regulator. Under RERA, builders must disclose the size of the apartment based on carpet area. For ongoing projects, yet to receive a completion certificate, the promoter needs a separate account. The builder must deposit 70% of the money collected from homebuyers in this account. This must be done within three months of application for registration. The government wants to prevent diversion of funds to other projects belonging to builders, thus ensuring timely delivery. 

Meanwhile, the rollout of GST is expected to further streamline the realty sector. The aim is to discourage purchase from unregistered dealers. So, the government has imposed a reverse charge on the recipient. This adds to the compliance cost of the purchaser. 

Related: Home buying mistakes to avoid [gifographic]

The bottom-line
It remains to be seen if the rollout of GST will actually benefit homebuyers. Given the massive scale, initial hiccups are likely to crop up in the first few months, at least. On the face of it, property prices in metro cities might shoot up. Remember, homebuyers could pay 17-18% in taxes (12% GST plus stamp duty), which is a significant increase from the present 11-18%. But builders could pass on the benefits of ITC to customers. Or, at least, the government directive requires them to do so. There is little doubt that GST will bring more accountability to the real estate sector, and will provide a traceable trail of money. Thus, homebuyers can hope that the government will make the property buying process much easier and hopefully, a little lighter on the wallet as well.    

 
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