(iStock)
(iStock)

Opinion | What GST realty cut means for you

  • The rate cut will induce buyers’ enthusiasm, though developers will face challenges as the input tax credit is now excluded
  • More properties from the premium budget now fall in to the affordable category, benefitting buyers mainly in cities like MMR and NCR, where property prices are high

The triple benefits offered to the real estate sector so far in 2019 are major booster shots that will not only improve sentiments of buyers, but also of investors and builders.

Multiple sops in the recent budget, banks lowering their interest rates, and the recent GST rate cut for affordable and premium homes gave the boost the realty sector needed to accelerate momentum.

Let’s look at the real gain that homebuyers will reap in cities such as the National Capital Region and Mumbai Metropolitan Region, where prices are exorbitantly high and any price reduction, even marginal, will boost buyer sentiments. The rate cut will induce buyers’ enthusiasm, though developers will face challenges as the input tax credit (ITC) is now excluded.

Additionally, cement continues to be taxed at 28%. Builders will either take a hit on their profit margins and not adjust current prices, or raise prices in the absence of ITC benefit and irk homebuyers again. Before builders rework their calculations, here is the cost of property before and after the rate cut.

Premium properties: Let’s assume a property of size 1,000 sq ft costs Rs. 5,000 per sq ft. With the old GST rate of 12% and ITC benefit, the buyer effectively paid Rs. 4.2 lakh as overall GST cost, assuming the builder honestly passed on the ITC benefit. If he didn’t, the GST payable was Rs. 6 lakh, an ambiguity of Rs. 1.8 lakh. Effective from 1 April, the new GST for premium properties will be 5% without ITC. Considering the same property parameters as above, the new GST to be paid by the buyer will be Rs. 2.5 lakh. Hence, you get a total benefit of Rs. 1.7 lakh. So, while buyers now have reason to cheer, the new rate cut has put builders in a fix. The exclusion of the ITC benefit to builders and failure to reduce the GST rate on cement or other main raw materials may cause developers to raise property prices after sales begin to improve. The result: renewed aggravation to homebuyers.

Some builders may decide to safeguard their profit margins and risk deflating the positive consumer sentiments by hiking property prices. Others may seek to use cash payments for input materials, thereby increasing the scope of black money in the market. However, the tighter norms and checks now in place could make such shenanigans difficult. The main benefit to builders in the near-term is increasing housing sales, which can help reduce their unsold stock substantially and improve their balance sheets to some extent.

Affordable homes: Changing the definition of affordable housing and extending the qualifying price range to less than 45 lakh across the country was commendable. More properties from the premium budget now fall in to the affordable category, benefitting buyers mainly in cities like MMR and NCR, where property prices are high. A property sized 500 sq ft, priced at Rs. 3,000 per sq ft, currently costs Rs. 3,120 per sq ft including GST and the benefit of ITC by the builder.

Post the new rate of 1%, excluding ITC, the overall property cost will be Rs. 3,030 per sq ft, a flat reduction of Rs. 90 per sq ft. Reduction in GST rates will, to some extent, attract more buyers towards under-construction properties that were losing their sheen, compared to the ready-to-move-in properties that are exempt from GST.

Anuj Puri, chairman, Anarock Property Consultants

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