Goods and Services Tax (GST) is finally here and will be effective across the country from 1st July 2017. The new uniform tax regime has been formed to do away with the overlapping, double taxation system prevalent in our economy, saving end-users from shelling out various taxes on the same product at different levels. However, speculations are rife as to which items in the market will be cheaper and which won’t. When it comes to home prices, GST can have varying impacts.
While the construction cost of a building — including the value of land — could increase when taxed at a uniform structure of 12%, the input tax credit (ITC) on raw materials, now made available under the new GST regime, can lower the actual tax incidence.
Even though the introduction of input tax credit on key building materials like cement, steel, paints, and other items will reduce the net tax on finished products, the effect of GST might not be felt uniformly across the real estate spectrum. Let’s get into a segment-wise analysis of the GST impact on home prices.
The GST Impact on Affordable Segment Homes
Apparently, the GST Council has spared the affordable housing segment — a prime thrust area of the current union government — by fixing the GST rate at 12 percent, 6 percent lesser than the standard rate of 18 per cent. This essentially means that the net prices of homes in the affordable segment priced below Rs 3,500 per sq ft will most likely go down by 5 percent once GST makes its way in from 1st July
How GST Will Unfold for Mid to Premium-Segment Home Buyers
The scenario, however, is a bit different for premium home projects. Builders’ association, CREDAI foresees that apartments in the premium category could become pricier. CREDAI Chairman Geetambar Anand said homebuyers will gain significantly for projects that have a price-tag up to Rs 6,000 per sq ft. A premium project — according to CREDAI Vice President, Manoj Gaur — will not benefit much from GST but the new input credits, if allowed rightly, will be favourable to most homebuyers.
A major downside of the new taxation system effective nationwide is that it won’t consider any “abatement” (a reduction of taxation) for land, which is a key raw material for real estate developments. “The input tax credit is going to be available only on materials. So, if the component of land is more than the material cost, the tax incidence will go up,” a Telegraph report cited Abhishek Jain, a tax expert with E&Y. “The 12 percent tax has been arrived at keeping the land cost at one- third of the total cost,” Jain stated.
Mainly for this reason, non-metro and suburban areas such as Barrackpore, Sonarpur, Pailan, Baruipur, Barasat, etc. will profit from the tax reform as the cost of land in these neighbourhoods are lesser compared to upscale, high-demand locations, for example, Alipore, Ballygunge or Park Street.
A CRISIL report covering the new taxation policy states that real estate developers under the new GST system will be taxed at the rate of 18 percent and 28 percent for steel and cement respectively, and at a flat rate of 28 percent for inputs like white goods, paints, and other raw materials. These construction inputs, however, will be eligible for an allowance of credit on the taxes paid as the GST for final housing products has been finalised at 12 percent.
On the whole, realtors and tax consultants across the country feel that fixing the Goods and Services Tax for real estate at 12 percent is a buyer-friendly move that would either be tax neutral or might lead to lower tax liabilities on home purchases. The GST, put together, can possibly lower the cost of homeownership, reduce compliance costs, and bring in more transparency in the Indian real estate market.