GST rate cut can encourage real estate industry

Homebuyers are immersed with very good news. Beginning o this month, the budget proposed an extra deduction of ₹1.5 lakh on interest rate paid on loans for affordable housing estimated up to ₹45 lakh. A week ago, the State Bank of India decreased its negligible cost of lending rate (MCLR) by 5 basis points over all tenures. By themselves, the two measures are probably going to have a constrained impact. The extra deduction may not get completely used and the rate cut by SBI is negligible at best. However, if these advantages are joined with a prior change in GST rules, the weight on the purchaser’s pocket could ease significantly.

In March, the GST Council diminished the GST rate for residential under-construction property from 12% to 5% and for affordable housing from 8% to 1%. The real estate segment, which was flopping under the triple effect of the Real Estate Regulation Act, demonetisation in 2016 and introduction of GST in 2017, finally had something to cheer about.

But, the decrease in GST rates won’t reduce home costs for purchasers to the same extent. Under the new standards, developers won’t be able to claim input tax credit (ITC). The new tax rules decides that 80% of inputs and input services must be bought from registered people. Any deficiency in buys as indicated by these standards, will draw in a tax levy. For example, tax on cement purchased from an unregistered individual will draw in a 28% duty. Under the past system, the builders could claim ITC for the tax they paid when obtaining different products and building materials, including steel, cement, paints and electrical things. This used to be in the scope of 2-3% of the base cost. Likewise, remember that the introduction of GST has not subsumed the stamp duty and enrollment fees that are still a state subject and fluctuate depending on the location of the property.

In case they can’t claim ITC, builders are probably going to increase the base cost of the unit to account for the unclaimed amount. This, thus, will eat into the overall increase of the buyer from the GST rate cut. The overall gain is decreased from 7% to simply 4.5% because of the elimination of ITC.

But, even after taking to considering the loss of ITC, the bringing down of GST rate will convert into noteworthy savings for homebuyers, particularly those picking the affordable segment.

Under GST rules, sale of a prepared to-move-in residential or commercial property isn’t viewed as a supply of a good or service. Subsequently, no GST is payable in such cases. The tax just applies to under-construction property. Till now, realy property was more in demand because of the fact that there was no GST. But, the rate cut has scaled down the price gap between under-construction and finished projects in the affordable segment. This is probably going to restore demand for under-construction affordable housing ventures, particularly in more current markets and rising urban cities.

The redefinition of affordable housing and the GST rate cut could breathe new life into the real estate sector. It will also simplify tax rules for the real estate sector and improve compliance.

Contact Certicom Consulting who have best GST consultants for any further queries.