Here is how GST is expected to impact home prices

To say the least, the Indian real estate sector has been going through significant transformation in the recent times. The recently implemented Real Estate and Regulation Act (RERA) has already started addressing the issue of non-transparency and affixes a level of accountability on real estate builders and brokers which is unprecedented in the history of the Indian property sector.

For the residential real estate sector, the implementation of GST will definitely be a positive sentiment booster among property buyers. GST may not be instrumental in bringing down the prices of residential real estate over the short term. However, it will benefit all the stakeholders of the residential real estate sector, as the perception of the sector will improve on the back of a simplified tax structure and accountability being fixed at every stage.

A simple and transparent tax applied on the purchase price is the biggest take-away for property buyers. Under the GST regime, all under-construction properties will be charged at 12 percent (excluding stamp duty and registration charges). It will not apply to completed and ready-to-move-in projects, as there are no indirect taxes applicable in the sale of such properties.

VAT (with rates differing from one state to another) and service tax together accounted for 7-9 percent of the ticket price for a residential property, which is 3-4 percent lower than the GST rate. However, due to information asymmetry, consumers were largely unaware of how VAT and service tax are calculated – definitely, the entire tax calculation was too complex for laymen to understand.

Any real estate product comprises three expense components, namely land, material and labour or service costs. VAT is calculated on material cost, and service tax is calculated on labour and service costs. It is very difficult for buyers to ascertain what components were included for calculation of VAT and service tax.

The implementation of GST makes the calculation much simpler, since the buyer has to pay only a single GST. Also, the builder must pass on the benefit of the price reduction he enjoys due to input tax credit to the buyer.

The affordable housing sector, which is a major thrust area of the incumbent government and is the cornerstone of its ‘Housing for all by 2022’ vision, will not be impacted by GST. This has been clarified by the announcement from the Finance Ministry, which indicates that there will be no tax under GST for housing projects which comes under the affordable housing scheme.

In the previous tax regime, real estate developers also grappled with the challenge of multiple taxation. On various construction materials they purchased, builder paid customs duty, central sales tax, excise duty, entry tax, etc., thus creating various instances of multiple taxation. The cumulative burden eventually got passed on to the buyer.

GST will eliminate all the other taxes, and the benefit of being able to claim input tax credit can also improve developers’ profit margins.

Major construction materials have not seen a major change in tax rate.

· Cement will be taxed at the rate of 28 percent under GST, which is higher the current average rate of tax around 20-24 percent.

· Iron rods and pillars will be charged at the rate of 18 percent, which is similar to the average rate of 20 percent under the old taxation regime

· Paint, wall fittings, plaster, wallpaper and ceramic tiles will be taxed at 28%, which is also similar to the previous average rate of 20-25 percent.

· Sand lime bricks and fly ash bricks will be taxed at 5%, which is lower than the previous rate of 6 percent.

However, the marginal change in the percentage of these variables will make a huge difference as transportation and logistics costs reduce in the single taxation system.

While there might be a marginal impact on the real estate sector in the near term, we are definitely looking at a significant improvement in buyer sentiment and perception of this sector. Developers, too, will find the GST regime much simpler to work with, with the benefit of input tax credit being an added advantage.