While the impact on the Goods and Services Tax will not be significant on the real estate sector, property sales will weaken for one to two quarters prompting developers to pass on cost benefits to homebuyers, says rating agency Fitch Ratings.
Over the medium term, developers may be encouraged to pass on the cost benefits to customers to comply with the anti-profiteering clause introduced in the Central Goods and Services Tax of 2017, it says.
“We believe developers may also choose to pass on cost benefits to customers to try and limit a prolonged slowdown in property sales, in an industry where demand/supply fundamentals are already weak,” says Fitch.
Property developers will be subject to a final effective GST rate of 12 percent on property sales, because the tax authorities will assume that land costs consist of one third of the sales price for which the 18 percent GST rate will not apply. This will still be 7.5 percent points higher than the former 4.5 percent effective sales tax, it says.
However developers’ ability to claim input tax credits will also increase with the imposition of GST, because input credits can now be claimed against steel and cement which are key raw materials.
“The impact of GST on property prices will not be significant if developers pass on these benefits to customers – we expect home prices to rise by no more than 1 percent-2 percent if the benefit of lower costs is passed on,” it says.
The higher end of that range would apply to developers which cater to higher-income customer segments, where land prices are higher and profit margins wider.
The impact of GST on property sales will also be limited because the tax will only apply to sales made after July 1, 2017, whereas most large homebuilders’ (March 2018) revenue and cash flows will stem mainly from sales made before that.
Furthermore, sales contracted after July 1 for new projects should not be affected because developers should be able to reflect the impact of GST in new construction contracts.
However, sales contracted after July 1 from existing projects – i.e. where construction is underway – may have to reflect the full 7.5 percent price increase stemming from GST, because renegotiating existing construction contracts with contractors may prove to be challenging, it says.