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Slash in GST has buyers hopeful but experts ask to read between the lines

There is still no clarity on some key factors, such as whether there will be a corresponding change in levies on input materials like cement and steel.

real estate Updated: Mar 06, 2019 19:50 IST
Lavina Mulchandani
Lavina Mulchandani
Hindustan Times
GST,Real Estate,Mumbai
Experts believe that tax cuts on under-construction property have to also benefit the developer if it has to reach the buyer. (iStock)

Last week, the Goods and Services Tax (GST) council cut the tax rate on under-construction residential properties from 12% to 5% and on affordable housing from 8% to 1%. On paper, these look like great savings, given that any real estate price drop in Mumbai translates to a home being that much within one’s reach.

“The move has got me to consider that I can finally buy a home, as it may be cheaper now,” says Gautam Jaikar, 29, a businessman from Thane. “But I still don’t know what actually decides the final price of a home and whether this cut will is helpful.”

Aashish Agarwal, head- Consulting Services at real-estate consultancy Colliers International India says the lowered rates will “get the fence-sitters buy homes.” He’s referring to young buyers and nuclear families in metro cities for whom buying a home means more scrimping and saving than in a smaller town. “We are likely to see the many under-construction homes getting sold,” he says.

Others believe this may not be true. Because real-estate is never that simple. The new GST rates will be implemented in April 2019. Here’s everything you should know before you make the decision of investing in real-estate now.

Look before you buy

The move claims to be in favour of home buyers. But it still may not cause a substantial price drop. Buyers may actually end up paying more. “There is no change in the input tax credit, which developers get for paying taxes towards manufacturing material and labour,” says Sohrab Bararia, associate partner heading Indirect Tax at tax and accountancy network BDO India. “Major inputs and input services in real-estate, including cement, steel and construction workers are taxable at 18% to 28%. Developers need to get clarity over where will these costs be adjusted, or they will be passed on to the home buyer.”

Along with the GST cut, the government also expanded the scope of affordable homes. “Homes of carpet area up to 60 square metres in metro cities and up to 90 square metres in non-metro cities priced up to Rs 45 lakh qualify as affordable homes, they have GST rate of 1%,” says Sharad Mittal, director and CEO of investment advisory Motilal Oswal Real Estate. “Buyers in this segment usually prefer waiting until a project was completed before buying it. A lower GST rate might help them buy when the home is still under-construction as it will be cheaper. But will have to wait longer to get possession of the home if the project takes longer to complete.”

Make it clear

Since input tax credits have not been lowered, many believe that the developer will add those costs to the flat cost. “Even with low GST, the final costs may be higher,” says Shubham Mittal, senior manager at VBGS and Co Chartered Accountants. “The buyer will have to pay 5% GST and 28% tax that developer paid for construction material and labour wages. So a total tax of 33%.” Some developers might resort to buying the material illegally to keep costs down.” Neither situation is pleasant for buyers.

Experts believe tax cuts have to also benefit the developer if it has to reach the buyer. “GST on cement, for instance, is too high and you cannot build a project without cement,” says BK Goenka, president at Associated Chambers of Commerce and Industry of India (ASSOCHAM). “It should be reduced to 18% from the current 28%.”

There is no clarity on the fate of office complexes. “We do not know if there will be any changes on the taxes on developing, leasing, renting and buying commercial property,” says Bararia. These often affect the prices of the overall neighbouhoods too. “It is hence too early to say whether the GST cut will help the home buyer or the industry.”

For now, it’s a game of wait and watch, says Niranjan Hiranandani, managing director and founder of Hiranandani Group, a Mumbai-based real-estate developer. “Since it will be effective from April 1, we will only know if it worked in the next financial year.”

First Published: Mar 06, 2019 19:50 IST