The GST Council on Sunday announced a cut in the goods and services tax (GST) on under construction residential property, bringing down the rate to just one per cent for affordable housing and five per cent for other segments. While this is certainly expected to boost demand in the affordable segment, experts note that for the overall realty sector it is a mixed bag.
The government’s decision to not extend input tax credit (ITC) benefit to developers is seen hitting their margins, with some sector experts saying that they might pass on the extra cost to buyers in the mid- or premium-segment.
However, customers in the affordable segment will see prices fall sharply. “A wider spectrum of home sales in non-metros will now see significant reduction in cost, thanks to the revised cost and area definition,” noted Aashish Agarwal, head (consulting services), Colliers International India. With affordable housing now being defined as falling within the Rs 45 lakh price ceiling, more properties qualify for this category encouraging more developers to build more affordable homes.
“Reduction in GST will bring down the cost of houses for buyers by around 6-7 per cent on the overall purchase price, depending on the category of house,” said CARE Ratings.
For developers however, the removal of any ITC benefit makes the move less welcome. While industry watchers say many developers were passing along 3-5 per cent cost reductions for customers by passing on ITC benefits, some have not. Those developers will now have to recalibrate their project pricing and bring it down by around 7 per cent, a sharp blow to their margins.
“It is disappointing that the council has chosen to not allow developers claim input tax credit. The real estate sector is in a very poor shape and needs significant help from the government to finish the current inventory,” R K Arora, chairman, Supertech said.
This might affect both developers and customers in metros more than their non-metro peers. “Excluding projects in Mumbai and prime areas of Delhi and Gurugram, where land cost is at least 50 per cent of overall project cost, developers in South Indian cities and Pune stand to lose 3-4 per cent of ITC under the new GST rate regime. They will have to bear incremental costs on units already sold and registered and may try to raise prices for new customers to recoup these losses,” notes Adhidev Chattopadhyay, analyst at ICICI Securities.
However, with nearly 88 per cent of inventory under construction in the Mumbai Metropolitan Region (MMR) region, 83 per cent in Bengaluru and 87 per cent in the National Capital Region (NCR), experts don’t see much headroom for a price hike, at least over the near term.
A price hike, if rolled out by developers, is also likely to be restricted to luxury and premium segment units.