How the GST rate reduction will impact property prices

SINCE DEVELOPERS WILL NOT BE ABLE TO CLAIM INPUT TAX CREDIT, WILL COST OF PROPERTY COME DOWN?

Once accepted and included in the official gazette, GST would be charged at an effective rate of 5% on the total value of non-affordable under-construction properties (property costing ₹45 lakh and above), which would be 7 percentage points less than the earlier effective rate of 12%. However, in case of low-cost or affordable housing, GST would be charged at an effective rate of 1%, down from the current 8%. Here is how the new GST rate will impact property prices.

Will the Price of Property come down?

Though the GST Council has recommended a rate cut, it also restrained developers from claiming ITC on various raw materials like cement, steel etc. As explained, developers used to claim ITC, bringing down their cost. But with developers not being able to claim the ITC, will the overall cost change?

“Developers will be burdened with GST payments to vendors, suppliers, agencies and contractors and this will land up increasing the cost further amid the already shrinking margin in business due to dynamic policies implemented by government," said Parth Mehta, managing director, Paradigm Realty, a real estate developer.

Prices of the apartment will start looking northwards if developers lose ITC, said Om Ahuja, chief operating officer, residential business, K Raheja Corp., a real estate developer.

Kapil Sharma, partner, Lakshmikumaran & Sridharan Attorneys agreed. “For buyers, prices may not actually reduce (after GST reduction) as the developers would not take hit of the tax cost which is incurred on the goods/services and such cost would form part of the price of the unit," he said.

However, some experts differ, and believe that given the current market situation, it would be difficult for developers to pass on the ITC burden to the home buyers. “The withdrawal of ITC could impact the profitability of real estate developers. Developers will need a price hike of 2-4% to maintain margins, which seems difficult in the current market scenario," said Rahul Prithiani, director, CRISIL Research.

In general, it is expected that cost of buying a house will come down, but not to the same extent by which GST rates have been reduced.

 

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