Property Prices Don’t Get Reasonable Any Further with GST Reducing to 5%

The effect of the GST rate cut on the home prices for buyers is not quite amazing instead, houses might turn out to be more expensive for some despite the decline from 8% to 1%. The discredit goes to the removal of Input Tax Credit that was previously available with the 8% charge on affordable housing.

The reduced 1% GST looks attractive but is not beneficial for either the developer or the buyer since it is now deprived of the ITC benefit. This benefit is a deduction on the final GST accountable to the already paid tax at the time of buying raw materials.

Affordable houses fall within a sale price range of 45 lakh rupees. The carpet area endowed is 90 square meters or below than that in cities other than Metros, such as Nagpur. Based on this criterion, the cost of per square foot area for affordable homes can rise as much as 4,000 rupees as expected by the builders.

The anti-profiteering law makes it mandatory for the developer to pass the ITC benefit on to the home buyers. When GST was charged at 8% on affordable housing, the sale price would be fixed after adjusting the ITC. Chartered accountants have figured out the impact of the GST rate cut on the price of homes that the buyer will have to pay.

Say, if the price per square foot area is 4,000 rupees considering the ITC, the GST of 8% will cause the consumer to pay 4,320 rupees per square feet. In the opinion of the local builders, the cost of raw materials amounts to 1,500 rupees approximately per square foot. On attracting tax at the rate of nearly 15%, the cost would offer a credit till 225 rupees for each square foot. The developer would then fix the sale price by subtracting this credit amount.

But in the absence of the credit, the final sale price for the buyer will now get loaded by the tax, which the developer has paid on construction inputs. Therefore, the previously mentioned price of 4,000 rupees per square foot will now rise to 4,225 rupees and coupled with 1% GST, will amount to 4,276 rupees. We see, that the sale price declines negligibly by 52 rupees per square foot based on the newly reduced GST rates but the given input cost rate of 1500 rupees per square foot.

With the construction costs calculating to 2,261 rupees for each square foot as suggested by the ready reckoner rates, the available Input Tax Credit surpasses the tax to be paid.

With the existing 8%, GST on affordable housing, the tax to be paid on 4,000 rupees per square foot area is 320 rupees while a credit of 339 rupees is available on the nearly 15% GST charged by the raw materials. But the addition of1 per cent GST without the ITC (Input Tax Credit) will increase the final sale price by 64 rupees per square foot causing the consumer to pay 4,384 rupees for each square foot area.

The removal of Input Tax Credit will in a way put an end to the disputes between developers and buyers for the latter being deprived of the benefit. But the cost for developers will increase slightly as analyzed by the experts. The calculation of ITC was troublesome since the payments arise at stages.

The previous GST rates and construction costs made the ITC exceed the payable tax but the same won’t happen now.

 

The obvious rule of the decline in price with a reduction in tax rate stands irrelevant in the case of Real Estate housing purchases. Prices won’t reduce if ITC cannot be claimed. The cost of under-construction housing units will not decline favorably due to the suggested reduction in GST. Instead, it will become a burden for the developers.

The existing tax structure has allowed the builders to utilize ITC benefit for meeting the given GST liability, where 12% GST was levied on the housing projects under construction. Let not the celebration for the implementation of new GST rates from 1st of April overcast the complications that are going to arise pertaining to this change.

The Indian Real Estate sector has been sluggish over a long period of time with the unsold inventory reaching its summit back in 2014 that has eventually declined in the previous year but still a long way to go for getting fully cleared. In such a scenario, reduction in housing prices is most desired for the benefit of the industry as well as the home buyers.

The credit chain being obstructed through the withdrawal of Input Tax Credit, the developer’s GST liability on construction inputs will get added to the construction cost, which will also decrease the financial gain of the developers. The possibility of the developer to pass on this burden to the consumer, cannot be ignored. The tax rate on elevator and cement are 18% and 28%, respectively. Without the availability of ITC, the developers will have to pay more and then retrieve their losses by increasing the final sale price. Practically, the units in the premium housing segment will not witness any lowering of prices.

What should have been the ideal GST rate on under-construction projects to retain the availability of Input Tax Credit?

The GST rates should have been reduced to 3% instead of 1% and the 5% would have been kept 7% without discarding the availability of Input Tax Credit, in the opinion of a realty expert. The restriction to ITC benefit due to a lower tax slab will force the builders to elevate the sale price in order to compensate for their losses.

Despite this disadvantage, there is some scope for the housing demand to elevate following the marginal reduction in the under-construction property prices. Besides, the fully constructed properties are free from GST, which will also encourage demand and the Government revenues won’t get hampered.

Real Estate specialists feel that the builder should be provided with an option between the existing GST rates with Input Tax Credit and the diminished rates without ITC to find out what he chooses.

The change in tax rules has also further aroused complexities for the developers since the details regarding the implementation of new GST rates April 1 onwards, can be availed by them, not before March 10.

The buyers can enjoy the privilege of minimized GST rates provided the developers do not increase the base rate for recovering their loss of ITC benefit or else it would result in anti-profiteering issues.

Looking for flats in South Kolkata within your budget? Contact us at transventor.com where you are offered ample choices to compare prices, locality and then shortlist properties. Through the hassle-free site visits arranged by us, you will be able to finalize your selection without any doubt. We offer all possible assistance to carry out the transaction in the smoothest possible way.

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