The 33rd Goods and Service Tax (GST) Council meeting was held on 24 February 2019, in which the council recommended rationalization of GST rates on real estate. The cut has been re-structured right in accordance with industry expectation. Once accepted and included in the official gazette, GST would be levied 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% lesser than the earlier effective rate of 12%. However, in case of low-cost or affordable housing, GST would be charged simply at an effective rate of 1%, less than the current 8% rate. Now let us see here in detail how the new GST rate will impact property prices.
For tax purposes, the process of buying an under-construction property was seen as paying for a service from the builder of a project. But since GST got implemented now, it has replaced service tax in such transactions.
While on the other hand, 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 an expensive under-construction property is purchased, the transaction attracts GST at 18% on two-thirds of its value, which effectively will come to 12% GST (on total value) with full Input Tax Credit. And 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.
Apart from GST, the purchaser 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 nation. This means that the purchaser has to pay an additional about 20% of the property value in GST and other fees when buying a house.
Both home purchasers, as well as developers, have been demanding the government to cut down the GST rate on residential properties.
In its meeting on 24 February, the GST Council said, “There are reports of a slowdown in the sector and low off-take of under-construction houses which needs to be re-addressed. To bring a boost in the residential segment of the real estate sector, the council recommends reducing the rates.”
On the basis of this recommendation, 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 levied on the entire value of the property in affordable group categories instead of 12% on two-thirds of its value. However, it has not been clarified yet whether the new GST rate is flat or there is any advocacy for land cost.
A separate clarification has been brought on the affordable housing properties for 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.”
Note: Metropolitan cities include Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, and Faridabad), Hyderabad, Kolkata, and Mumbai (the whole of MMR).
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 while bringing down their cost. But with developers not being able to claim the ITC, will the overall cost change?
Mr. Parth Mehta, the managing director of Paradigm Realty, a real estate developer furnished a doubt saying “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 the government”.
While on the next hand, Mr. Om Ahuja the chief operating officer for residential business at KRaheja Corp., a real estate developer said that prices of the apartment will start looking northwards if developers lose ITC.
Mr. Kapil Sharma, a partner at Lakshmikumaran & Sridharan Attorneys agreed that “For buyers, prices may not actually reduce (after GST reduction) as the developers would not take a hit of the tax cost which is incurred on the goods/services and such cost would form part of the price of the unit”.
However, different experts have come up with their different notions, and believe that given the current market situation, it would be critical for developers to pass on the ITC burden to home purchasers. Mr. Rahul Prithiani, the director of CRISIL Research said “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”.
Having gone through all the Pros and Cons, it can be expected that cost of buying a house shall come down, but the percentage of this difference would not be up to the same extent by which GST rates have been reduced. However, the purchaser will definitely get a good relief in comparison to the pre-reduction cost. The Govt. has been taking crucial steps to make the GST concept more transparent and cost-effective for every common citizen.