There’s a famous scene in the movie Glengarry Glen Ross in which real estate agents are complaining about the quality of leads. Two agents tell a visiting
What is the impact of GST bill on real estate industry?
Net impact – GST will lead to increase in property prices in urban areas and minor decrease in fringe/rural areas.
GST will actually benefit only affordable houses where land prices are less. For all other houses, GST will have an inflationary effect eventually leading to lesser profit margins for real estate developers and/or higher property prices for buyers. The same is summed up well in this article –
The impact on Real Estate Developers / Builders – No major change in overall gross cost of construction
Like other manufacturers, they can now claim input tax credit on many items homogeneously, be it GST (Service Tax) collected on the bill of the architect or GST (VAT) collected on the bill of cement. It will simplify the process of tax collection and credit, however the multiple GST monthly returns will also make the whole process very cumbersome initially. Non-compliant vendors will create friction in the process. Any direct gains (savings in material costs) will be offset by indirect losses (additional manpower and machinery to manage GST issues and additional tax on services).
The GST on construction materials is the higher side and hence the cost will not come down much unless manufacturers are able to optimize their product pricing after adjusting for GST themselves. The GST on services (18%) is also higher than before hence that will also lead to minor inflation.
GST applicable on:
Aggregates, Gypsum = 5%
Fly Ash Bricks = 12%
Fly Ash, Steel = 18%
Cement, Tiles, Sanitaryware, Paint, Plywood, Electrical goods = 28%
Average Effect = 24% approximately
To calculate the total GST paid by the real estate developer let us assume the total cost of construction including materials, labour, consultancy fees, brokerage, etc. to be about Rs. 2000/sqft of builtup area. Out of that the tax component works out to be approximately Rs. 354 / sqft. This figure will vary between Rs. 200–400 for most construction projects in India.
Previously, the taxes on under construction properties in Maharashtra were 1% VAT and 3.7% Service Tax, totaling to about 5% of taxes, of which only the service tax component was allowed to be setoff against tax paid during construction. GST will allow further setoff for materials as well, leading to an additional benefit of Rs. 200–300 / sqft.
The impact on Real Estate Buyers – Affordable houses to become cheaper. All other homes to become more expensive.
The GST rate applicable for under construction properties is 12%. Ready possession properties are exempt from GST.
The GST collected from the buyers will be offset against the GST already paid in the construction stage by the developer and this benefit will be passed on to the buyers by virtue of reduced sale prices. However as you can see, the GST collected from buyers in non-affordable segments is far higher than the GST paid during construction.
Property prices will be reduced by Rs. 200–300 / sqft. in all projects, however the overall hike in taxes from 5% to 12% will negate that benefit for all projects that are not in the affordable segment. Infact, it will lead to increase in prices and it will be cheaper to buy ready possession properties instead. Sadly, it will also encourage black money or cash component in deals in order to save on 12% GST + 6% Stamp Duty taxes.