The GST Council’s decision to reduce GST rates was welcomed by homebuyers and realtors alike. However, as the realities of the situation set in, the scenario does not seem as hopeful as it was being perceived initially.
As reported earlier, the Goods and Services Tax (GST) Council in its meeting held on February 24, 2019, has taken a decision to reduce the GST rate on under construction properties, with effect from April 1, 2019. Under the proposal, for houses under the affordable housing category, the rate is proposed to be reduced from 8 percent to 1 percent, whereas for other properties it is proposed to be reduced from 12 percent to 5 percent, with certain other modifications on the computation of GST liability of the developer.
The announcement brought a wave of relief in the real estate industry. But how relevant it actually is?
Will GST Cut really result in a reduction of property prices?
Contrary to the obvious deduction that the GST rates have been reduced by a substantial 7 percent, the real impact may almost be negligible or even negative. Since the proposed rate cut comes with setting off of the input tax credits, the builders might just have to increase the base prices of the final product.
Presently, the GST on inputs like cement is at 28 percent and marble, granite and iron is in the 18 percent slab. However, while levying the GST on home buyers, the developers are allowed to claim set off of the GST already paid by them for the supply of various inputs for construction of the property, which in turn is called ‘input tax credit.
The provision was made so that developers can pass on the benefit of the input tax credit to the home buyers, in the form of reduced base prices of the houses. However, over the last few months, it was claimed that many realtors and developers are not passing on the benefit.
In the recent proposal, the GST Council has decided that while availing of the benefit of lower rates of GST, the developers will no longer be able to avail of the input tax credits.
Since there is no scope of any benefit now, property rates are bound to go up, at least to offset the loss caused to the developers due to the bar on input tax credit under the new regime.
Will GST Cut Push Under-Construction Properties?
Buyers, especially in Delhi NCR and MMR, are now more aware and are willing to stay away from under-construction properties owing to endless delays in the possession.
Even if it is assumed that houses do become cheaper marginally, will it be a good idea to invest in something where there is no 100 percent guarantee?