GST and its impact on property prices

The implementation of the Goods and Services Tax (GST) will make India a unified common market wherein tax calculation on any goods or services would entirely be on the cost of the final product.


The gist of GST:

As a destination-based tax, GST will subsume numerous indirect taxes such as excise duty, service tax and value-added tax (VAT) currently levied by the central and state governments. Under the new taxation system, the Central GST (CGST) and the State GST (SGST) will be the two components wherein the Central government will levy and collect CGST while state governments will levy and collect SGST on every supply of goods and services within the states.


GST and Real Estate:

GST is expected to usher in a new era for the real estate industry by bringing transparency and improving the supply chain mechanism in the sector. In India, the real estate sector is the second largest employment provider after agriculture. In addition to the core housing segment (both residential and commercial), real estate stimulates demand for cement, steel, paint and a slew of other ancillary segments of the economy. Not to mention that it contributes approximately 5%-6% of the Indian GDP and is one of the key sectors of the economy.


Impact on under-construction projects:

The GST rate on under-construction properties is 18%; however, the effective tax on such properties would be 12% as the government has allowed input tax credit benefits equivalent to one-third of the cost of key raw materials that any builder or developer purchases. That said, new launches in the short term may get affected as the sector adjusts to the new tax norms.


Impact on ready-to-move-in projects:

Ready-to-move-in projects have been kept out of the GST ambit. Hence, developers will have to bear the tax burden for such projects as they would not be able to get full input set-off credit for ready-to-move-in flats. This could essentially mean that homebuyers will have to shell out more for ready-to-move-in flats.


How GST will help home buyers:

In the previous tax regime, a home buyer had to pay several indirect taxes, including excise duty, value-added tax and service tax, which amounted to a tax outgo of about 11%, excluding stamp duty. Now, even if the standard GST rate at 12% seems slightly more, buyers have a reason to cheer as GST will simplify tax compliance and minimise the scope for double taxation.

Moreover, as GST will subsume multiple taxes into one, the effective cost of construction will come down for developers. And that would mean homes would, in fact, become cheaper. Meanwhile, the government has asked developers to pass on any benefits that they may avail under the new tax regime to the home buyers.


For developers:

For developers, the actual tax effect is expected to be lower under GST due to the input tax credit on raw materials. Additionally, the consolidated tax regime will stop the practice of double taxation, which has done more harm than good to the sector given their cascading effect that mostly resulted in higher prices for end users.

With GST expected to bring down the cost of construction largely because supply chain costs will come down, this would essentially mean more liquidity into the market and, in turn, a boost in home sales. Simultaneously, free flow of credit will also translate into an increase in margin for developers.

Last updated on July 26, 2017

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