GST from 1 July: Housing prices to get expensive as high land cost to negate benefits of credit input cost

As the Goods and Services tax (GST) countdown has begun, new cost dynamics in real estate is getting the sector abuzz with a lot of queries coming up from the customers’ end. Specially buyers who had booked under- construction homes are keen to know the new increased/reduced cost equations.

The truth is, post 1 July, the customer may need to shell out more money for the same unit. He will need to dig deeper into his pockets.

The whole exercise of GST in real estate is to bring down the project cost of developers. And the government thinks that under GST, the credit input for construction cost of materials will be passed on as benefit to buyers. Yet, that input credit benefit accounts for a very small sum as construction cost is a small percentage compared to land cost which occupies a greater percentage of the home sale price says Farshid Cooper, Managing Director, Spenta Corporation.

So in plain words, what the government has been proclaiming that under GST, the input credit would offset the headline rate of 12 percent, in reality that may not happen.

And since no abatement has been given on land, the situation in metros and big cities will be a thing of big concern.

 GST from 1 July: Housing prices to get expensive as high land cost to negate benefits of credit input cost


Earlier, the customer paid around 4.5 percent tax on the value of his apartment excluding stamp duty. The new GST rules impose a heavy 12 percent tax on customers, to that add another 5 percent stamp duty. So on the total value of apartment around 17 percent will go in paying taxes and stamp duty. It is a dead loss to customers. And it is quite a big sum to be payable as taxes.

Given that the government is pursuing affordable housing for all initiative, to make it workable on ground rather than being just a cherished dream, abatement should be granted to real estate, this is a demand from the developers. Consider this, with 17 percent tax for a city like Maharashtra, how affordable segment will benefit is anyone's guess. For a Rs 30 lakh house paying 17 percent tax is a large sum. Burdening people with tax is not the way to go forward. It will also dampen the GDP growth.

The developers have done their calculations and feel that once the actual tax price hits the customers, they do not know how the market will react. But they do know one thing that the present tax rates will neither work out for the sector nor for the economy.

In this regards, builders’ body CREDAI too pointed out in an article in The Economic Times that the GST regime does not eliminate multiple taxation for the real estate sector, and availing input tax credit may not be feasible, thus limiting the capacity of developers to absorb the additional tax burden or pass on the benefits to home buyers.

The developers are strongly hinting that the benefits going to customers will be marginal and ultimately the customers will be burdened with a heavier tax. And with cement prices likely to shoot up falling under 28 percent slab, it will not ease off price burden for the buyers. Hence, the underlining fact is that the input tax credit would not be sufficient to counteract the heavy tax burden rate. They further reason out that if tax rates can be reduced for the gold industry then why not for real estate? After all, real estate, after agriculture is the largest employment generator as it is allied with several industries.

A semi government body NAREDCO' s western head VP Rajan Bandelkar is of the view that the government should treat real estate as a priority sector, otherwise it will turn out to be a disaster as all the tax burden will ultimately fall on the customers. The industry will not do better. Problems will arise in each segment of the industry, and it will majorly impact all metros. As it is, the sector has been witnessing shocks after shocks; the first being demonetisation followed by RERA, and now the increase tax rates under GST.

Housing is an essential commodity and the government should take cognisance of this fact. To provide consumer relief, there has to be 40-45 percent reduction in taxes. Around 8 percent of GST should be palatable to customers if not lower, says Cooper.

The customer is left with a choice to buy ready flats but then such flats have always been expensive. All in all the customer will have to pay less interest rate on home loans but a higher tax rate.

No doubt GST shall bring in more transparency in the real estate sector providing an audit trail for better control. But there shouldn't be any adverse impact of GST on real estate.

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Updated Date: Jun 29, 2017 18:05:53 IST