Since developers will not be able to claim input tax credit, will cost of property come down?
The cost of buying a house will come down, but not to the same extent by which GST rates have been cut
In its 33rd meeting held on 24 February 2019, the Goods and Service Tax (GST) Council recommended rationalisation of GST rates on real estate. The cut is in line with industry expectation. Once accepted and included in the official gazette, GST would be charged at an effective rate of 5% on the total value of non-affordable under-construction properties (property costing ₹45 lakh and above), which would be 7 percentage points less than the earlier effective rate of 12%. However, in case of low-cost or affordable housing, GST would be charged at an effective rate of 1%, down from the current 8%. Here is how the new GST rate will impact property prices.
How is GST charged?
For tax purposes, the process of buying an under-construction property was seen as paying for a service from the builder of a project. Earlier, this attracted service tax. But since GST got implemented, it replaced service tax in these transactions.
A completely built property has been kept out of the GST regime and a buyer need not pay any GST for it.
At present, if a non-affordable under-construction property is bought, the transaction attracts GST at 18% on two-thirds of its value, which effectively comes to 12% GST (on total value) with full input tax credit (ITC). ITC helps a business reduce the GST amount it has paid on inputs or raw material from the amount of GST it has to deposit on the output. This credit is passed on to the buyers. Similarly, in case of affordable under-construction property, GST is charged at 12% on two-thirds of its value , which effectively means 8% with full ITC. One-third of the value is considered to be the cost of land and, thus, not considered for GST.
Besides GST, the buyer has to pay stamp duty and registration fee on a property. Stamp duty is levied by respective state governments and usually varies between 5% and 8% across the country. This means that you have to pay an additional about 20% of the property value in GST and other fees when buying a house.
Homebuyers as well as developers have been asking the government to reduce GST on residential properties. While GST rate was rationalised for affordable housing project earlier from 18% to 12% (effective 8%), it was not good enough.
Continuous slowdown in the sector and the government mission of Housing for All by 2022 has led to further reduction in GST on under-construction property. In its meeting on 24 February, the GST Council said, “There are reports of slowdown in the sector and low off-take of under-construction houses which needs to be addressed. To boost the residential segment of the real estate sector, we made the recommendation to reduce the rates."
Based on the GST Council’s recommendations, now an effective GST rate of 5% will be applicable on the value of a non-affordable under-construction property, and not 18% on two-thirds of its value. Similarly, the new effective rate of 1% will be charged on the entire value of a property in affordable group categories instead of 12% on two-thirds of its value. It is not clear whether the new GST rate are flat or there are abetment for land cost.
Besides rationalising the GST rate, the government issued a clarification on the properties that can be considered as affordable housing both in metro and non-metro cities. The Council said, “A residential house or flat of carpet area of up to 90 sq.mtr (about 970 sq.ft) in non-metropolitan cities or towns and 60 sq.mtr (646 sq.ft) in metropolitan cities having value up to ₹45 lakh (both for metropolitan and non-metropolitan cities) will be considered as affordable housing unit." Metropolitan cities include Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR).
Will the cost come down?
Though the GST Council has recommended a rate cut, it also restrained developers from claiming ITC on various raw materials like cement, steel etc. As explained, developers used to claim ITC, bringing down their cost. But with developers not being able to claim the ITC, will the overall cost change?
“Developers will be burdened with GST payments to vendors, suppliers, agencies and contractors and this will land up increasing the cost further amid the already shrinking margin in business due to dynamic policies implemented by government," said Parth Mehta, managing director, Paradigm Realty, a real estate developer.
Prices of the apartment will start looking northwards if developers lose ITC, said Om Ahuja, chief operating officer, residential business, K Raheja Corp., a real estate developer.
Kapil Sharma, partner, Lakshmikumaran & Sridharan Attorneys agreed. “For buyers, prices may not actually reduce (after GST reduction) as the developers would not take hit of the tax cost which is incurred on the goods/services and such cost would form part of the price of the unit," he said.
However, some experts differ, and believe that given the current market situation, it would be difficult for developers to pass on the ITC burden to the home buyers. “The withdrawal of ITC could impact the profitability of real estate developers. Developers will need a price hike of 2-4% to maintain margins, which seems difficult in the current market scenario," said Rahul Prithiani, director, CRISIL Research.
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.