Decoded: Buying a house? See how this move will benefit you
Central government cut GST rates drastically on Sunday and this is set to ensure affordable housing becomes cheaper. It will also make sure that housing prices are not hiked indiscriminately going forward.
Central government cut GST rates drastically on Sunday and this is set to ensure affordable housing becomes cheaper. It will also make sure that housing prices are not hiked indiscriminately going forward. CRISIL Research decodes exactly what it means and who all this step will really benefit. Currently, the goods and services tax (GST) is levied at 12 per cent with input tax credit (ITC) on payments made for under-construction property or ready-to-move-in flats where completion certificate is not issued at the time of sale. For affordable housing units, the existing tax rate is 8 per cent.
First of all, who will it impact negatively? Well, GST cut is set to be a leg-up for boosting realty demand, but it may well be a drag on realtors' profits as withdrawal of input-tax credit will impact developer margins, as price hikes will be difficult. Image source: Reuters
Government has announced a drastic 700 basis points’ reduction in Goods and Services Tax levied on under-construction affordable-housing projects - from 8% to 1% (effective rate after deducting one-third towards land cost), and from 12% to 5% for other under-construction housing projects (effective rate after deducting one-third for land cost). However, this is a mixed bag for real estate developers, says CRISIL Research. Image source: PTI
How will it affect the public? Will it make them rush to buy homes? CRISIL Research says that it will marginally increase end-user demand over the near-term. Says Rahul Prithiani, Director, CRISIL Research, “Over the past two years, preference for completed projects has been clearly visible because of the additional GST burden and execution risks associated with under-construction properties. With the RERA framework evolving and GST reduced, end-user confidence towards under-construction properties will improve. This should also gradually improve volume growth and liquidity of cash-starved developers. Overall, the announcement would be neutral for developers.” Image source: PTI
CRISIL Reseacrh adds that the withdrawal of input tax credit (ITC) announced would impact the profitability of developers. It added that there were concerns on ITC not being passed on by developers. Also, exact computation of tax credit was a challenge as real estate projects have long gestation periods, often spanning 4-5 years. Until now, this made it difficult for developers to gauge the extent of ITC for buyers as calculations also differ for projects launched before and after GST implementation. FM Arun Jaitley said on Sunday that the consumers felt that the benefits of ITC were not being passed on to them by the builders. Image source: Reuters
Experts have hailed the governemnt step in slashing GST rates on housing and termed the move as a "revolutionary step". They said it will boost sentiments and help the cash-starved sector in clearing around 6 lakh unsold homes. CREDAI President Jaxay Shah said, "The reduction of GST on affordable housing to 1 per cent is a revolutionary step for Indian real estate. This move is a significant triumph for home buyers and will play a huge hand in boosting their sentiments". Image source: Reuters