GST was touted to be a gamechanger for all sectors, including real estate. It was largely anticipated that GST will provide a much-needed respite to homebuyers by way of reduced property prices. Unfortunately, with GST completing one year, it emerges that these expectations were unrealistic.
While the tax-on-tax has been eliminated with the advent of GST, the overall outgo from homebuyers’ pockets seems to have increased by as much as 8% across cities. This ultimately reduces the demand in real estate. Also, the higher tax rate on purchasing a home - an already staggering expense for most Indians - has kept many home buyers and investors off the market.
Let’s understand this better.
- In real time, the cost of raw materials under the GST regime underwent minor changes - cement, paints and plasters were taxed at 28%, and iron material at 18%. Building housing with high-quality materials has bumped up the overall cost, as most materials used in the construction process fall in the 28% tax category.
- Moreover, end-users have not received any consummate benefit of GST because of the inherent ineffectiveness of the anti-profiteering provisions. They will only benefit if the base property prices are reduced and developers pass on the tax credits to their customers, which unfortunately is not happening.
- Another problem with GST is that it was restricted to under-construction properties, while ready-to-move-in homes and land were exempted from it. This considerably reduced end-user demand for under-construction properties.
- Meanwhile, builders reduced the supply of the new housing projects. As per ANAROCK data, approximately 68,500 units were launched between January to May 2018 across the top 7 cities, which is 4% lower than the new launch figures for January-May 2017 (approximately 71,500 units).
- Earlier this year, the Government extended the concessional rate of 12% GST for construction of houses under the Credit-Linked Subsidy Scheme (CLSS) in order to promote affordable housing, which was given infrastructure status in the 2017-18 Union Budget.
- While the effective GST rate came down to 8% post deduction of one-third of the amount the property incurs towards land costs, it did little to impact the overall absorption of homes in this segment.
- Moreover, back in 2015 under the PMAY scheme, the Government set a target of building 5 crore homes in less than a decade. However, as per data, India has added only 180,877 homes under the scheme since its launch, underscoring the challenge in achieving this ambitious target.
Anuj Puri, Chairman, ANAROCK Property Consultants