GST impact: affordable housing prices may dip marginally

As the GST rolls out today, the unifying tax structure is expected to have a neutral impact on the residential real estate market, which has been facing a rather slow momentum, with the affordable housing sector taking the cake.

While it will definitely be a game-changer for the Indian industry, bringing in a more comprehensive and uniform tax structure that will ensure greater transparency in the economy, there are certain areas in which the industry seeks clarity.

With under construction projects falling under the 12% bracket, prices may not witness significant changes, the industry concurs.

On prices

House of Hiranandani CMD Surendra Hiranandani said, “It is unlikely that GST will have any impact on property prices. We feel that it might marginally bring down prices in the affordable segment, owing to the input tax credits, but it is unlikely that similar impact will be felt in mid-priced or premium developments.”

Gera Developments MD and CREDAI (Pune) Vice-President Rohit Gera, explained, “On the face of it, the 12% rate is an increase of 6.5% in terms of the tax payable by flat purchasers, however, there is the option of getting full input set off credit on all inputs side if GST is paid. It is expected that the net effect of the credit set off benefit will leave the overall tax revenue to the government as neutral.”

He added however, the entire concept of GST is that the final consumer bears the overall tax and therefore the tax rate to the end consumer is much higher. This is therefore likely to lead to a reduction in the rate per square foot quoted by developers (since they will be able to get the benefit of the input tax credit). However, the total cost to the end consumer may change slightly depending on the actual specifications, location and other details of the project.

“While developers might still get some benefits for projects that are in nascent stage, they will have to bear the tax burden for ready-to-move in projects since they are kept out of GST ambit,” added Hiranandani.

On the other hand, “Prices are going to rise as the customers would find it difficult to get the benefit of input credit factored in the price they are paying to the developer,” opined Amol Shimpi, Associate Dean and Director, School of Real Estate, RICS SBE, Mumbai. 

Knight Frank India CMD Shishir Baijal said, “The impact would be primarily tax neutral, but loaded with gains for the affordable housing sector. Developers who did not get the benefit of ITC (Input Tax Credit) in the pre-GST era will now be able to avail it. It would also add another strategic push to affordable housing, which in turn will drive the recovery of the residential sector.”

However, since GST is not applicable on ready projects, developers will either have to bear the burden of the tax since it cannot be passed on to the end consumer or the rates of apartments that are ready to occupy will increase to the extent of the taxes. In this context, Gera said, “This will lead to a change in the quoted price by the developer but overall cost to the end customer will stay largely unchanged.”
“While developers might still get some benefits for projects that are in nascent stage, they will have to bear the tax burden for ready-to-move in projects since they are kept out of GST ambit,” said Hiranandani.

On costs

The impact on the overall economy will filter through to the real estate, construction, and warehousing sector. In construction, inputs such as cement and ceramic, tiles, building blocks and bricks, prefab structural components for buildings, among others, have been placed in the 28% category, whereas, other components such as iron and steel have been placed in the 18% bracket. Work contracts addressing construction intended for sale were classified as a service and were placed in the 12% category.

This being one of the major considerations, Puravankara MD Ashish R Puravankara said, “Specifically, the impact of taxes on construction materials, cement and steel will come down considerably for developers, which ranges between 12-18%. With the rates in place now implementation of GST to our business is expected to bring down the project cost for developers, thereby leading to lower acquisition cost for under-construction apartments.”

“It is noteworthy that the value of land would be included in the amount charged from the end-user,” said CBRE Chairman India and South East Asia Anshuman Magazine.