With real estate prices going through the roof and the Impact of GST on property prices being ambiguous to prospective home buyers as well as developers, there is an increasing need for more information.
There is also a need for better understanding of GST and its impact on property prices, and what it means for you when you’re buying a home. With the recent GST law change on 24th February 2019 there are some things you need to keep in mind while you’re buying your home. Here we will discuss those aspects.
1. Affordable housing
Housing projects in the affordable segment used to attract a GST of 8%, this has been changed to 1% after the recent decisions made in the GST council meeting on 24th Feb. Considering input tax credit, the earlier proposal pointed out that the rate would be cut down to 3%. The following is what constitutes affordable housing:
- In case of Metro cities: Residences with a value of up to Rs.45 lakhs, and a carpet area of up to 60 sq.m or 645 square feet.
The following come under metro cities:
Bangalore
Chennai
Delhi NCR
Hyderabad
Kolkata
Mumbai - In case of Non-metro cities: Residences with a value up to Rs.45 lakhs with a carpet area of up to 90 square meters or around 950 square feet.
Previously, builders and developers were not required to pay GST in cash because they would have enough input tax credit to pay their GST. Changes are being worked on by the government to make the real estate sector attractive again. The growth of the real-estate sector has a two-fold effect. It helps in the growth of allied industries such as building/construction materials, as well as providing direct and indirect employment.
2. Will GST help home buyers?
A meeting on 24th February covered “Under construction property” and “Private lottery distribution” and how the GST rate cut will impact this.
After the GST council passed the draft notifications, the announcements on rate cuts were notified on 10th March 2019 and were made applicable from 1st April 2019. After being accepted, GST was to be charged at 5% instead of 12% on the cumulative value of all non-affordable, under-construction properties (Any property costing above 45 lakh), a 7 percentage point deviation from the earlier effective rate of 12%.
3. How will GST impact real estate?
The impact of GST on real estate is twofold. In the case of premium properties, while the basic construction cost may come down a little, the input tax credit is limited to 12%, which will not be enough to offset the fresh tax liability because of the taxes paid on other expenditures.
4. GST on ready properties
According to a CRISIL report, currently, a developer pays excise duty and VAT on steel and cement at 18.1% and 27.7% respectively. If the OC for the project has been received, then, no GST will be applicable. Under the new GST regime steel and cement will be taxed at 18% and 28% respectively. Finally, this begs the question what is the rate of GST on the purchase of flat? The housing unit (final product of production), will be taxed at 12%, with credit for taxes paid on inputs, making the rate of GST on the purchase of flat 12 %, which would be enough to provide the input credit for the developers. Hence, a buyer opting for a ready-to-move-in apartment is saved from an unnecessary tax burden.
5. Tax Calculations
The tax calculations are in fact not as simple as they seem. For example, GST on under-construction projects will be charged to home buyers on sale price but the credit can be availed by the developers only on the cost of construction.
Consequently, whether you purchase an under-construction property or a ready-to-move-in unit, developers will hike the prices in that proportion, to make sure the tax gap is bridged, to protect their own profits.
6. Will GST make home loans expensive?
One question prospective home buyers often ask is will GST make home loans expensive, or will GST help home buyers? Before evaluating the likely impact of GST on home loan costs, it is important to understand the parts that will be impacted by the increased rates under GST. The main cost of taking a home loan is the interest payment on the principal. This cost will not change, as there is no service tax or GST on it. Stamp duty will not change under GST.
The abatement rules will determine if the effective tax incidence on real estate, is lower or higher under GST. Real estate developers in India are on the edge of their seats, less tax would mean more money for the best real estate developers in India.
7. Composition scheme:
In addition to all of the above parameters, a composition scheme is also in place that is affecting the GST on all of the aspects of home prices. Under the composition scheme there is a 3.5% abatement on home prices in the above 45 lakhs range, considering three-fourths of the house value.
In other cases, the abatement goes down to 70% of the house cost, making the effective rate 4%. Considering all of these above parameters will be an integral part in determining whether GST prices will impact home prices in a positive or a negative manner. It could mean good news or very bad news for real estate companies in India.
In addition, as states have different state-level taxes, the implication of GST will not be the same considering all of the states. However, if the GST slab for real estate is finalized above 12%, then, home buyers and developers may take a hit, at a time when property prices are already unaffordable in many places, which might mean a problem for all prospective home buyers, or people who are looking for a home at the moment. It could spell a problem for the young generation who do not own homes as of now. These are some of the impacts that GST will have for real estate and housing prices. In general, it is expected that cost of buying a house will come down, but not to the same extent by which GST rates have been reduced.