With the revolutionary ‘Goods & Services Tax’ or GST effective from July 1, 2017, most industries are waiting to see the impact it brings. One such industry is the real estate industry. While GST is expected to bring in more transparency in real estate, there is speculation whether it will ultimately lead to decrease in property prices.
The GST is likely to cause an increase in the prices of under-construction properties. Currently, these properties attract 4.5% service tax along with 1% VAT (in Maharashtra). When an average stamp duty of 6% is added to it, the total tax outgo for a customer becomes 11.5%. However, the GST regime calls for a flat 12% rate on under-construction properties, increasing the total tax liability to 18% (12%+6% stamp duty). This would also make home loans a little more expensive for the homebuyers as the home loan EMIs will also increase subsequently.
Though it appears that the rates will shoot up, the actual scenario will depend on factors such as-
- cost of land, as it is kept out of the GST ambit for now
- input tax credit passed on to the builders from vendors
- circle rate of the area
- stage of construction
Cost of land directly impacts the unit cost. If the land cost makes up only a small part of the overall cost of the project, the prices might not increase too much and vice versa.
Secondly, real estate works hand-in-hand with other industries like cement, sand and steel. Any change in the price trends of allied industries will have direct impact on the property market. Now the actual effect of GST on real estate will depend on the tax credit passed on through different levels. Builders will benefit from the credit passed on to them by the vendors, which, in turn, will allow them to pass on the benefits to customers, in the form of reduced unit cost. However, the property rates cannot be brought down below the circle rate (known as ready reckoner rate in Maharashtra).
The real benefit of the credit pass over will be enjoyed by those who invest in the properties at the initial stage. The upcoming projects are likely to enjoy lower input cost because of tax credits offered to the raw material industries, which will reduce the cost of construction. But the customers will have to pay 12% tax on the selling price of the unit. This is why the government expects builders to pass on the benefits of low input cost by reducing rates.
Even if the property prices increase marginally in the coming months, experts say it is a good sign as the market will only stabilise and not tumble down.
Ajay Mishra, VP & Head, Secured Loans, Paisabazaar.com, said, “Though the new tax regime puts pressure on property prices, it should be beneficial for the real estate sector in the long run, as it brings the much needed uniformity and transparency. The impacts of GST and RERA, when combined with low home loan interest rates, is likely to create the right climate to invest in real estate. However, the actual benefit it brings and how it will ultimately impact the consumer will be clear only after it’s implemented.”