India's prospective home buyers are in a dilemma, ever since the Goods and Services Tax (GST) came into effect from July 1. With different rates of tax on properties, an informed decision seems difficult, if not elusive. Should they buy ready-to-move-in property or opt for under-construction houses to maximise their gains?
On ready-to-occupy houses, GST is not applicable and therefore, there are no gains from the newly-introduced indirect tax. This, according to a real estate developer, puts companies at a disadvantage and by likely implication, buyers. "While developers might still get some benefits for projects that are in nascent stage, they will have to bear the tax burden for ready-to-move in projects since they are kept out of GST ambit," Surendra Hiranandani, chairman & MD, House of Hiranandani, said in a note.
Properties under construction
For properties under construction, the applicable rate of tax is 18 percent, but gets reduced to 12 percent because there will be reduction equal to a third of the land value for the purpose of calculating tax liability. This gives effective rate of 12 percent, as against the earlier 5.5 percent. If there is a view that it is still favourable for buyers, it's because of the input tax credit that property developers will get, effectively bringing the tax liability.
But the benefits will be limited to the affordable housing segment, Hiranandani said. "We feel that the current rate of 12 percent on under construction projects might marginally bring down prices in the affordable segment owing to the input tax credits, but it is unlikely that similar impact will be felt in mid-priced or premium developments," he observed in his note.
On its part, the government is keen to be seen as not burdening home buyers."The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/installments ... It is advised to all builders/construction companies that in the flats under construction, they should not ask customers to pay a higher tax rate on installments to be received after imposition of GST," a government statement said.
Impact neutral, is another view
Overall, the impact is neutral for the sector, according to Oberoi Realty. "We have done our math and we clearly believe that GST is not going to increase cost to customers. If we read the finer details, the input credit takes care of the GST that is required to be paid. If everyone plays fair, home prices will mostly be cost neutral or may go up just about 2-3% in (a) few projects," Vikas Oberoi, MD of the company, told the Mint newspaper.