08 Mar 2019 19:46 IST

What do changed GST rates mean for real estate sector?

The rate cuts will have a varied impact across stakeholders, but may revive the sector in the long run

Recently, the goods and service tax (GST) council brought down the tax rates for residential properties, including affordable housing, in a bid to revive demand and improve the overall sentiment in the real estate market. Here we break down the impact on realty developers and buyers.

What’s changed?

The GST Council recently tweaked the GST (Goods and Service Tax) rates for residential properties and brought down the effective rate for ‘under-construction’ properties from 12 per cent to 5 per cent. For affordable housing, the GST rate was slashed from 8 per cent to 1 per cent. The definition of affordable housing has been relaxed as well. Those units costing less than ₹45 lakh and measuring up to 645 sq ft in metro and 968 sq ft in non-metro cities will fall under the affordable housing category. These changes are effective April 1, 2019.

Although the GST Council has cut tax rates, it has restrained realty players from claiming input tax credit (ITC) on raw materials, which had been allowed previously.

Impact

For the buyers:

Given the huge stock of unsold inventory and the lack of demand from buyers, the GST rate trim was expected to attract buyers to the market via lower sale prices. However, this is unlikely to happen immediately, for various reasons.

One, as there is no GST charged on completely built property, these would attract far more buyers than under-construction houses, even with reduced rates. According to Anarock Property Consultants, of the total unsold stock of 6.73 lakh units in the top seven cities, only 13 per cent are ready-to-move-into. Also, of 5.88 lakh unsold under-construction units, only 20 per cent will be completed in 2019.

Second, GST (on under-construction property) is only a part of the reason for buyers’ lacklustre interest. The Real Estate (Regulation and Development) Act (RERA), which came into effect in 2017, has failed to meet its intended purpose. Many States are yet to comply with RERA provisions of setting up a permanent regulator, appellate tribunal or a web portal for the registration process. There is still no proper recourse for the buyer if there is a project delay or any other conflict with the developers, in the case of an under-construction property.

Buyers still prefer completed projects from developers with a strong reputation and brand recognition.

Also, the GST rate reduction would result in price reduction only in some pockets. For instance, if the developers were not passing on the benefits of ITC earlier, then there would be a price reduction only for those projects.

For the developers:

The GST Council has not allowed developers to claim input tax credit; this could dent the profit margins of developers in the long run and could also increase the cost of construction. This may even lead to an increase in the eventual sale price of the property in buyers’ hands.

Though the GST rate cut could improve sales for developers, the liquidity crunch in the market will likely negate the impact.

However, realty companies with better brand and execution ability may well deliver strong sales. According to India Ratings and Research (Ind-Ra) if residential prices remain flat, affordability could improve in FY20. Large players such as Sun Teck Realty and Oberoi Realty have ventured into affordable housing projects, where project completion is quicker and volumes are robust.

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