GST rate cuts on real estate: How will it benefit homebuyers

The GST rate cut announced by the government of India would encourage homebuyers on the fence to take the plunge.

How GST rate cuts will benefit homebuyers

The GST council on February 24, 2019, decided to reduce the GST charged on the sale of under-construction residential property. This was done with the aim of stimulating demand in the real estate sector, which contributes 7.8% to the national GDP and is the second-largest employer after IT. This cut should have a positive impact on the economy by driving up consumption.
 
New Tax Rates

Starting April 1, the new rate of 5% will be applicable on all new housing projects that have not been issued a completion certificate, except for those classified as affordable housing. The current rate is at 12%. The GST council also announced that the applicable rates for affordable housing projects will also be slashed to 1% from the current 8%. Under the new rules, builders cannot claim any input tax credit (ITC).

The council also changed the definition of affordable housing. It would now include all properties with a carpet area of 90 square meters in metros and 60 square meters in non-metros as long as the cost of the property is under Rs. 45 lakh.

Sale of properties that have been issued a completion certificate/occupancy certificate by a competent authority does not attract GST. Stamp Duty will be payable on such properties instead.

Related: Budget 2019 makes bank deposits and realty investments shine again

Benefits for home buyers

The data available with property consulting firms shows that 5.88 lakh under-construction homes are unsold in the top 7 cities in India. Out of these, at least 34% fall under the revised definition of affordable housing. The GST reduction should help improve the unsold inventory situation as most of the 7% GST cut would be passed on to the buyer.

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Input tax credits amount to anywhere between 2.5% and 3%. The benefits of ITC were supposed to be transferred to the buyer. Now that this credit is no more available, the buyers should see their expenses go down by 4-4.5%. That said, given the improvement to the unsold inventory position, the builders may be willing to absorb the impact of ITC withdrawal and allow the whole 7% reduction to be passed on to the buyers. It is pertinent to note here that the unsold inventory in the under-construction segment has been rising for several quarters now.

For property costing Rs. 45 lakh, a 7% cut in GST results in Rs. 3 lakh saving for the buyer. Industry experts point out that the impact on sales would be more pronounced in tier II and tier III cities as the threshold level of price are lower here. Also, given that the prices have already bottomed in metros, the impact of ITC denial will be seen here. Meaning that while the smaller cities will see a full reduction of 7% in the home prices, the prices in metros will go down by 4-4.5% only (7% GST reduction – 2.5-3% increase from ITC denial).
It is also important to note that the revised tax rates are applicable from April 1, making March the transition month. This will cause buyers to postpone their purchase to get the benefit of tax reduction, resulting in much lower sales in March. Buyers are already requesting the builders to delay invoicing for this purpose.

Related: Real Estate deals by non-residents under the tax net

But what about the builders?

Many industry experts feel that the GST council should consider bringing both under-construction and ready-to-move (RTM) properties under uniform taxation. The reduction in GST on under-construction properties is a welcome move and will encourage many buyers who were on the fence to take the plunge. But RTM properties are still more attractive for the buyers as they do not attract any GST, and only a Stamp Duty.

Prudent developers aim to finance 60-65% of their projects from the advances in under-construction homes. Selling RTM homes lock up much more capital and are costlier for the builder. Therefore, if a project has most of its under-construction homes unsold – it is more likely to be delayed because of cash flow troubles. The reduction in GST rates would help improve the cash flow for builders.

Further, ITC availability for builders meant that trail of invoicing for all purchases were maintained. This reduced the employment of black money in the real estate sector. By doing away with the ITC, the incentive for maintaining the invoice trail has been taken away. The GST council did propose that a significant percentage of the purchases will have to be made from registered dealers. Finance Minister Arun Jaitley quoted, “For that back chain, a condition will be put that a very high percentage of purchases to avail this, will have to be from registered dealers. The Group of Ministers has proposed 80%. Whether it is 80% or more, the group will reconsider it and present before the Council”. This may be costlier to impose than ITC and may impact small unorganised players unfavourably. If you are still confused in real estate investment, here are 6 myths you can stop worrying about.

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