Increase in real estate taxation slabs puts developers in quandary

2 min read

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The taxes for the real estate sector have increased from 12% to 18% by way of GST. Builders and real estate agents are fearing that the GST rollout will lead to an increase in property prices. The taxes for the real estate have gone up overall and this burden may be passed onto customers which will lead to higher prices being paid for homes in the country. There is another major worry as to whether customers will be keen on purchasing more expensive homes.

At present, the service tax on construction projects is around 4-5% while there is also 1% VAT and 5% stamp duty. Under the GST regime, these projects will fall under this 18% slab. According to experts, the idea of a successful GST rollout is dependent on the tax credit system and its usage for the real estate sector. The mission behind GST is to abolish the cascading taxation instances or the tax-on-tax that is commonly paid at various stages of the entire real estate supply cycle. GST should be helping in keeping real estate costs relatively low in the affordable housing segment according to experts but may end up increasing overall costs for other buyers.

Experts also add that close to 70% of the Indian real estate market caters to the middle-high income category and GST could lead to smaller developers shifting their focus to the low-medium income segment which has higher volumes. Financial advisors do not expect much from GST with regard to lowering prices. According to some experts, housing prices will increase and customers may have to shell out more.

The Government has provided an assurance relating to the availability of input credit. However, this will apply on particular things. According to experts, in case a project is valued at Rs.100 crore and 25% of it is the cost of construction while the remaining 75% is spent on aspects like approvals and permissions, there will be no input credit for the latter half. GST may put a 5% extra burden on the entire sector and this will be passed on directly to buyers.

Also, if customers have already paid the initial amounts for their apartments, GST will apply on the final payments as well. The GST along with RERA may actually slow down home sales even more according to a few experts like it has happened over the last couple months since people are awaiting clarity on registration with RERA and GST. However, developers like Surendra Hiranandani, the Chairman & Managing Director at House of Hiranandani, feel that GST will not have any impact on property prices since the intent is to streamline the entire taxation process and also derive more business for the entire tax net.

He added that the present 12% rate on under construction projects may slightly reduce prices in the affordable housing segment on account of input tax credits but a similar impact is unlikely to be witnessed in case of premium or mid-range projects. He also added that there would be more clarity once the GST is implemented and the Government clarifies its stance with regard to the abatement available for the land costs with regard to working out service taxes on under construction projects.

However, Hiranandani conceded that GST may have a major impact on the final property prices since in a scenario where the land cost if 10% of the total project then there are chances that the costs may not go up as much as feared.

Resident Editor