Impact of GST rate cut on under construction housing in Bengaluru

On 24th February 2019, the GST Council announced a cut in the applicable GST on under construction properties. The new rate of 5 per cent will be applicable from 1st April 2019 and has been welcomed by the industry, as it will boost demand in the real estate sector. Currently, under-construction residential properties attract a rate of 18 per cent. After considering the input tax credit (ITC) on payments made the effective GST levied is 12 per cent. This rate is applicable on under-construction property or ready-to-move-in flats, where the completion certificate is not issued at the time of sale. Properties for which completion certificate has been issued at the time of sale do not attract any GST.

The pre-GST era

GST was introduced to simplify taxation, improve compliance, and pass on the tax benefits to the consumer. The pre-GST era was plagued by multiple taxation. For instance, earlier an under-construction house attracted 4.5 per cent service tax and a value added tax (VAT) of 1-5 per cent depending on the state. Also construction inputs we taxed12.5 per cent excise duty in addition to 12.5-14.5 per cent VAT and entry tax. This effectively put the tax incidence on under construction property at 15-18 per cent. The GST regimen simplified this and levied a flat rate of 12 per cent on such property.  

The need for rate cuts

While the objective of GST was to pass on the tax benefit to the buyers, Finance Minister Arun Jaitley recently said it has not been the case. Despite availing the benefit of ITC, builders have not passed on the benefit to the homebuyers. To remedy this, the GST council reduced the GST rate to 5 per cent and abolished the ITC benefit for the builders. In addition, to prevent the sector from going back to cash transactions, the committee is setting norms to ensure that the builders purchase a very high percentage of their inputs from GST-registered dealers.

While there are concerns that the elimination of ITC benefit may hit profitability for the developers, the potential surge in demand is likely to outweigh this. It’s also seen as a boon for the unsold inventory that’s been plaguing the sector for a while.

Impact of rate cut on homebuyers

GST cut is a welcome move for the homebuyers that can significant reduce their overall pay out. With a flat rate of 5% a homebuyer can save up to INR 3,00,000 on a super built-up area of 1,000 square feet, priced at INR 6,000 per sq. ft. But this would be a gain for buyers in cities where apartment prices are higher – at least upwards of INR 6,000 per sq. ft. The revised rates do not favour apartments that come in a lower price point in non-metro cities such as Bengaluru. In fact lower priced apartments might see a marginal price increase.

While on paper 5% GST looks drastically lower than the current rate of 12%, it has to been seen in light of removal of the ITC benefit. Projects where the developer has already given full benefit of the ITC to the homebuyer will not see much difference under these new rates.

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