Recently, the GST Council slashed the Goods and Services Tax (GST) rate on under-construction homes. With this, home buyers are trying to assess the impact of the rate cut. We look at some of the frequently asked questions about GST on real estate.
1: How are housing properties taxed under the GST?
A: Earlier, the GST was levied at 12% with an input tax credit (ITC), on payments made for under-construction properties or ready-to-move-in flats, where the completion certificate has not been issued at the time of sale. “Under the new rules, the GST rate has been slashed to 5% for under-construction homes, without according the benefit of the input tax credit. For affordable housing units, the existing tax rate has been reduced from 8% to 1%. The new measures will take effect from April 1, 2019 onwards,” explains Abhinav Joshi, head of research, CBRE India.
2: Will the absence of input tax credit against construction-related materials and services, increase the prices of properties?
A: Experts maintain that the withdrawal of input tax credit, will increase tax liability and impact the profit margins of developers. In such a situation, they are likely to pass on the liability to buyers, which might lead to upward pressure on prices.
3: If a buyer has already bought a property and paid certain advance under the 12% GST tax rate, what will be the impact of this transaction under the reduced 5% rate of GST?
A: The buyer may be eligible for GST at 5% on the balance payment, subject to the transition rules to be notified by the government, for carrying out the proposed amendments to the GST rate.
4: Will under-construction properties once again become attractive, as compared to ready-to-move-in properties, from a price point of view, after the reduction in GST rates?
A: “The advantage of a difference in prices, in buying an under-construction unit to a ready-to-move-in one, is around 5%. Generally, the price at the time of pre-launch or during the earlier phases of the construction period is lower, as compared to the period nearing completion or for a completed building. Hence, it may be beneficial for the buyer to opt for under-construction property,” suggests Rohit Jain, partner, Economic Laws Practice (ELP).
5: What will be the overall increase or decrease in property prices, following the implementation of the new GST rates?
A: Where the cost of construction is more than 35% of the value of the flat, the prices are likely to go up (for example, in regions like Thane, Dombivali, Kalyan, Mira Road, Pune, etc.) whereas for projects where the cost of construction is less than 35% of the value of flat, the prices are likely to reduce.
6: What benefit will home buyers get, from the reduction in GST rates?
A: According to India Ratings and Research Pvt Ltd, “The reduction in GST rates could lead to a monthly saving of Rs 800-1,000 for a home buyer, considering an average ticket size of Rs 25 lakhs, with a 7% reduction in the GST, in case of affordable housing units. The savings could also be in the range of Rs 2,750-3,000, considering an average ticket size of Rs 75 lakhs, with a 7% reduction in the GST for non-affordable units. This is after assuming that developers do not pass on the increase in prices, due to the non-availability of ITC.”
7: Do the buyers of under-construction homes need to make any change in their agreement with the seller, after a change in the GST rate?
A: Generally, the sale agreement between the buyer and the developer, will have a clause for ‘Change in Law’ which also covers changes in the tax rate. Hence, the buyer may not be required to make any change in the agreement. However, as a precaution, the buyer should once again go through the clauses of the agreement.