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GST on real estate reduced: Sales growth depends on whether buyers are comfortable with under-construction homes  |  February 27, 2019

Vivek Kaul

The Goods and Services Tax (GST) Council "worked hard" on a Sunday to declare some goodies for the nation, before the Lok Sabha elections later this year. In order to encourage prospective buyers to buy under-construction real estate properties, the GST Council reduced the GST on these properties.


Basically, GST on the affordable homes being constructed has been reduced to 1 percent, against the current effective rate of 8 percent. An affordable house is a house which comes with a carpet area of up to 90 square metres in non-metropolitan cities/towns and 60 square metres in metropolitan cities and having a value up to Rs 45 lakhs (in both for metropolitan and non-metropolitan cities).


Metropolitan Cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (the whole of Mumbai Metropolitan Region).


The GST on the non-affordable homes has been reduced to 5 percent, against the earlier effective rate of 12 percent. Anything, that doesn’t come under the definition of affordable housing, automatically gets categorised as non-affordable housing.


The other thing that needs to be mentioned here is that builders will no longer be able to claim an input tax credit on the taxes they pay on the different inputs that go into the making of a real estate project. This change comes into effect from 1 April, 2019.


What will be the impact of this? Let’s look at this pointwise.


1) The first thing that will happen is that most people comfortable with the idea of buying an under-construction property, are now likely to postpone it to after 1 April, 2019, in the hope of being able to buy at a lower price. The question is will they get a lower price?


2) Real estate experts are of the view that depending on the type of property, a cut in GST rates is going to lead lower prices by 6-7 percent. This, of course, comes with the assumption that builders will cut prices. The past record of builders on this front isn’t exactly very good. They seem to prefer to sit on huge unsold inventories rather than cut prices.


3) Also, the input tax credit on GST has been done away with. This is because many builders weren’t passing on the benefits of a lower overall GST because of input tax credit received, in the form of lower prices, to the buyers. Veteran real estate builder Niranjan Hiranandani told the media that the GST on cement, an important input into building real estate, hasn’t been reduced from 28 percent. And given this real estate builders will have a challenging time with no input tax credit available.


Once this factor is taken into account, whether builders will pass on a 6-7 percent cut in price to the buyers, remains to be seen. This will only become clear, after the developers have done their math.


4) The media and those associated with the real estate industry have as usual gone on an overdrive to tell all of us that this move is going to change the state of the real estate sector in India. As usual, they have come to a conclusion, a little more quickly than they should. The GST cut, or any other move by the government, cannot address the basic issue with buying under-construction properties the lack of trust of buyers in builders.


Over the last decade and more, many builders have taken money from prospective buyers, and not delivered homes. They have also pocketed the money that the buyers had given them. Many buyers have had to continue paying EMIs on their home loans, as well as pay rent because the project has either been delayed or the builder has simply disappeared with their money.


5) In this scenario, expecting prospective buyers to buy an under-construction property is basically a pipe-dream. One thing that real estate buyers have learnt in the last decade is to stay away from under-construction properties, and that isn’t going to change for a bulk of prospective buyers, so soon.


In fact, this trend is visible even in the home loan data. While home-loans continue to grow at a robust pace, the builders continue to sit on a huge amount of inventory of unsold homes.


In December 2018, outstanding home loans of banks grew by 17.1 percent. One of the explanations for this lies in the fact that people now prefer to buy homes which are ready to move in and owned by investors and stay away from under-construction properties.


6) Also, the idea that a price cut of just 6 percent will get buyers interested, is a little too far-fetched.


To conclude, in this scenario, assuming that the GST rate cut on under-construction homes will lead to the revival of the sector, is jumping the gun. It will take some time for the buyers to start trusting the builders again.


Meanwhile, the business model of the builders, where they take money from prospective buyers in order to build the property, has gone for a toss. And they have only themselves to blame.


(The writer is an economist and the author of the Easy Money trilogy)