Rate cuts introduced by the Goods and Service Tax (GST) Council may serve as a blessing for hopeful homeowners. Here’s why.
India’s real estate realm, which had already started looking bullish in the past fiscal year, has received a colossal revival with GST rate slashes on under-construction apartments and projects pending a completion certificate. Prior to this development, GST rates stood at 12% for homes under construction (in conjunction with an input tax credit) and 8% for affordable housing projects. Now, the equivalent rates have moved to 5% and 1% respectively. The input tax credit provision, however, has been retracted.
The move is expected to give rise to a perceptual shift among real estate buyers. While earlier, demand for completed properties was high owing to the zero-GST consideration, the recent GST reduction for under-construction apartments will see more Indians gravitating towards houses under development. In addition to the GST rate cuts, the extension of the umbrella definition for affordable housing in the GST context (to houses priced up to Rs. 45 Lakh) will catalyse inventory reduction for developers and open the affordable housing market to more hopeful homeowners. On the whole, buyers will save about 6-7% on their overall spends.
The Indian Real Estate Footprint
The Indian real estate market across India’s top 7 cities currently hosts just under 6 Lakh unsold under-construction homes, of which one-third fall below the Rs. 40 Lakh price point. Under the purview of the new affordable housing definition, a greater pool of properties is now eligible for GST benefits, providing equal value to both homeowners and developers.
Furthermore, the GST rate revision is expected to counterbalance the property price skimming paradigm that has long persisted in India’s top cities. Property prices in cities like New Delhi and Mumbai, despite having stagnated in recent years, still remain high. While ideal affordability is characterised as being about 4.5 times the average annual household income in a city, India’s leading cities hugely surpass that figure. Mumbai, for instance, still harbours an income-to-property cost ratio of 1:7, while in New Delhi and Hyderabad, the ratio is about 1:5. Although housing sales saw a surge in 2018, GST changes will provide renewed impetus to home buyers.
The Demand Versus Supply Debate
In an interesting parallel, the withdrawal of input credit tax may impact margins of developers. However, the surplus demand expected in light of GST changes should compensate any profitability setbacks of developers by ploughing in extra sales.
The recent GST rate cuts serve as a follow-up to a series of measures announced for the realty sector during the interim budget, chief among them, the exemption of income tax on notional rent on a second self-occupied house, and the rollover of capital gains on investments made in two houses for an amount of Rs. 2 Crore.
The GST changes in real estate come as a relief for the property sector, and are predicted to incite floundering prospective buyers into finally entering the homeowner market.