Due to the revolutionary ‘Goods & Services Tax’ or GST effective from July 1, 2017, most industries are waiting to see the positive or negative impact it brings. One such industry is the real estate industry which is not only growing but will also boom in near time. While GST along with RERA is expected to bring in more transparency in real estate business, there is strong guess by the experts which says that it will ultimately lead to decrease in property prices.
The GST is sure to bring a vast increase in the prices of under-construction properties. Currently for under construction as well as ready-to-move-in properties the buyer has to pay 18% as GST and is applicable throughout the country. GST is not charged on the complete value of the property; it is only charged on two third value of the property. One third value is considered to be the cost of land so the effective GST rate remains to be 12% only. The GST regime calls for a flat 12% rate on under-construction properties and the ready-to-move-in property, increasing the total tax liability to a little extent with few more percent. This would make home loans more expensive for the home buyers as the home loan EMIs will also increase subsequently.
Though it seems that the interest rates will shoot up, the actual scenario will depend on the following factors-
- Stage of construction
- Cost of land
- Circle rate of the area
- Input tax credit passed on to the builders from vendors
Unit cost directly impacts the Cost of land. If the cost of land 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 and many more. Any sudden change in the price trends of allied industries will also have direct impact on the property market. Now this clearly states that the actual effect of GST on real estate depends on the tax credit passed on through different levels. Vendors can benefit the Builders by passing on the credit, which in turn, will allow the builders to pass on the benefits to buyers, in the form of reduced cost per unit. However, due to the fixed circle rates set up by the state or regional development authority, the property rates cannot be brought down below the circle rate. There is a possibility of variance in circle rates in the same city.
The benefit of the credit pass over will actually be enjoyed by those buyers who invest in the properties at the initial stage of the project. The upcoming projects enjoy lower input cost because of tax credits being offered to the raw material industries, which will reduce the cost of construction. But the customers will have to pay a certain percent of tax on the selling price of the unit. This is the reason why the government expects builders to pass on the benefits of low input cost by reducing rates.
In near future, even if the property prices shows an increase marginally, experts say that it is a good sign as the market will only stabilize and not tumble down.
an expert in Financial Industry and Director, Gaurav Gaur, Mudrahome.com, said, “no doubt that the real estate market is tough and the new tax regime is definitely going to put lot of pressure on property prices, which in turn will be beneficial for the real estate sector in the long run. This will brings the much needed uniformity and transparency which will be quite helpful for the first time buyers. The lower interest rates of home loan along with GST and RERA will create a boon and provide the right circumstances to invest in real estate industry. However, the ultimate impact on the end consumer and the benefits will only be clear once it is implemented.