Impact of GST on Property Prices: Will Buyers Pay More?

Although the Goods and Services Tax (GST) may help builders to avoid double or triple taxation and reduce their cost of construction and operation, the moot question is how much will it help property seekers. We look at whether buyers will gain any benefits under this taxation regime

The regime of indirect taxation in the real estate industry, started as recently as 2004, when service tax was applied to works contracts of commercial properties. It was then introduced to residential properties and was followed by many state governments introducing the value-added tax (VAT) to all under-construction properties.

At present, developers do not get any input credit against the VAT and only a partial input credit against the service tax paid by them on their input cost. Now, with the introduction of the Goods and Services Tax (GST), the total incidence of tax will increase from 5.5 per cent to 12 per cent. However, developers will be able to avail of input credit, on all the goods and services purchased and spent in the construction of the property.

Shubhika Bilkha, business head, the Real Estate Management Institute (REMI), explains that “Developers will now receive the benefit of input credits, which will be deducted from their tax liabilities. The government is anticipating that builders will transfer these benefits to their customers, by way of price reduction, with a view to boosting consumer demand in a tepid sales environment.”

The government has also alluded that if necessary, it may use the ‘anti-profiteering’ rules, to ensure that builders transfer these benefits to the end consumer. It is, however, in the interest of the sector as a whole, to maximise consumer demand and encourage purchase activity, adds Bilkha.

See also: GST on real estate: How will it impact home buyers and the industry

 

How will GST impact property prices

Experts point out that the extent to which home buyers will benefit, will depend on various aspects and the complexities of the business.

Shrikant Paranjape, president of CREDAI Pune Metro, maintains that “The impact of the GST on property prices, will be difficult to gauge at this stage because of the lack of clarity on abatement for land value. In a product, where the major raw material is not covered by the GST and the completed unit is also not covered by the GST, the tax input benefit will be hard to calculate or justify. Only the market forces, the ready reckoner rates and time, will decide whether and how much benefit will be passed on by the developers to the purchasers.” Nevertheless, the affordable housing sector may benefit, because the land cost would be lower in the areas where these projects are being constructed.

The quantum of benefit that will be passed on by the suppliers, vendors and service providers of the developers, also plays a role in determining the final cost. If the cost does not increase, then, the entire input credit benefit can be passed on by the developers to the buyers.

However, the experience from the introduction of service tax, indicates otherwise. In 2006, when service tax became applicable for contractors, hardly any or no benefit of their input credit was passed on to the developer and the entire burden of 12 per cent service tax, had to be borne by the developer. Moreover, the prices of input materials can also be volatile. Cement and steel prices can soar, without warning. Similarly, sand is always in short supply and not available in the monsoons. Hence, it is likely that these industries may not pass on the entire benefit of tax credit.

Another important factor that needs to be examined, is the stage of construction. If the project is at an advanced stage, where substantial cost has already been incurred before the application of the GST, very little input credit will be available and very less benefit will be passed on. If the project is at an early stage, more benefits can be passed on.

 

Will the GST bring any benefit to home buyers?

Punit Agarwal, CEO and MD of Nirvana Realty, feels that there is no reason why realtors would not pass on the benefits from the GST to the buyers. “Buyers are the reason for this industry to run. Hence, they have a rightful share in the benefits, as well. However, there are many loopholes that are yet to be worked on, when it comes to the GST process. We are yet to receive clarity on a lot of things. Hence, right now, it is difficult to say what benefits we or our vendors will receive. A clear picture will emerge, only after 3-6 months.”

Dhaval Ajmera, director of Ajmera Realty, says that the GST will boost the affordable housing sector. “Buying a home will now be easier, as the benefits will now extend to both, the developers and the end-consumers,” he says.

Surabhi Arora, senior associate director, research, Colliers International India, explains that Clause no 171 in the GST relates to anti-profiteering. “However, the implementation looks dubious and a lot will depend on the developers’ ability to claim the credits. In the short term, buyers should not expect much benefit from the GST. Clarity on the full implications of the GST on prices, will come only after its implementation. However, in the long term, we expect that the entire structure will bring transparency and will benefit the buyers,” Arora concludes.

 

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