The decision of the GST council to decrease the GST rates on the under-development properties from 12 to 5 % and 5 to 1% on the affordable housing section, without the advantages of Input Tax Credit (ITC) has been appreciated by the homebuyers and real estate stakeholders. This step is predicted to escalate the demand for the under-development properties, especially in the affordable housing section which will witness increased sales in the coming times. People who were holding themselves back in buying their home will now have a golden chance to purchase their dream home at an increased incentive. However, there is a catch to it.

The government has eliminated the ITC, claiming that the builders were not offering complete advantages to the buyers. Already facing the NBFC crisis, real estate developers will now have to battle additional load of taxes, which most probably will be transferred to the buyers. As far as we know by now, this move will definitely elevate the final prices of properties for the buyers.

Comparative analysis of both the situations-

Before (GST with ITC) 

The government used to impose 12 % GST on under-development properties till now while providing the advantages of ITC. In regards to affordable housing, GST was set at 8 % after considering one-third decline instead of land costs. Real estate developers were able to assert ITC advantages on tax paid for building materials like steel, sand, and cement. This credit helped them in counterbalancing GST responsibilities. The ITC advantages affirmed by the developers was bound to be transferred to the buyers under the Anti-profiteering clause. However, the government claimed that the developers were not providing all the advantages to the buyers. Apart from that, the stakeholders were also demanding for the tax rate cut considering the huge number of unsold under-development properties in big cities.

After (GST without ITC)

After the latest deduction of taxes by the GST council, under-development properties will engage 5 % GST, whereas affordable housing up to Rs 45 lakh will be taxed 1%, unaccompanied by the ITC advantages after 1 April 2019.  The developers would now be not able to assert the credit on the input prices of raw materials and labour. Numerous taxes were included under GST for the ITC advantages which used to bring the construction prices down for the developers. Mayur Shah, managing director of Marathan group said that the elimination of ITC will result in the profit reduction for the developers. Whether the market replies by increasing prices or whether developers will take the hit will be seen soon.

How will the elimination of ITC affect house costs?

Let’s assume the general price of an affordable house is Rs 4000 per sqft. Under the previous rates, a buyer will be responsible to pay 8 % GST on the last price of the home after reducing the ITC amount. A developer generally spends Rs 1500 per sqft in construction materials and inputs during building an affordable home. The developer is responsible to assert inputs of Rs 225 per sqft with an average tax rate of 15 % on input prices. Assuming the developer was transferring the complete advantages to the buyer, the price at which the buyer will pay 8% GST would be Rs 3775, that amounts to Rs 4077 per sqft.

However, under the revised rates, the developers cannot ask for the ITC advantages, which means the price at which the buyer will have to pay the newly adapted 1 % would be Rs 4225 per sqft. The tax, which would be paid in this scenario will be Rs 42.67 per sqft, taking the final price to Rs 4267 per sqft that is Rs 190 per sqft more than the previous one.

Summing Up

The deducted GST rate will offer relief to the real estate world, but that would be a brief introduction of hypothetical positive belief. Although the under-development section will be heavily benefitted, not providing the ITC advantages to developers will result in the rise of the costs of apartments. The developers with no ITC will be forced to escalate the prices otherwise they will have to bear the losses. In this scenario, the best time to purchase an affordable home is now as there is no certainty about the future prices.

Disclaimer : The perspectives communicated above are for instructive purposes which are simply dependent on industry outlines and related documents. Per Square Feet does not ensure the exactness, perfection, or the absolute quality of the data and will not be considered in charge of any reaction dependent on the published data.