While homebuyers laud the reduction in Goods and Services Tax (GST), realtors feel that the announcement would further slowdown the liquidity flow in the sector and would severely impact their profit margins. Let’s find out how the GST cut would impact the realty stakeholders.
The GST Council’s announcement on reducing the Goods and Services Tax (GST) to five percent from 12 percent for under-construction units and one percent from eight percent for affordable housing with the rejection of Input Tax Credit (ITC) has not gone down well with the developer community. However, homebuyers are praising the government since the reduced GST implies reduced property values and more savings. While homebuyers laud the move, realtors are disappointed at the announcement since they anticipate a temporary slowdown in the sector's cash flow and a cut in their revenues.
It’s pointed out that the ITC available now will increase the construction cost for developers, especially in the affordable housing segment and this might be passed on to the homebuyers. Therefore, the odds are high that the property prices might shoot up and residential demand may subdue in the process. However, the government opines that the homebuyers and the realty market will be unaffected by the move since the reduced tax burden on middle-income buyers will act as a significant catalyst in reviving the housing demand. Furthermore, the increased residential demand will not only help in clearing the existing inventory stock but would also ensure adequate cash flow in the sector. Overall, the move will benefit both the builder and the buyer.
Homebuyers will experience a potential reduction of 6-7 percent on their overall purchases. While cities like Delhi NCR, where property prices have already bottomed out, may not experience much decrease in its property rates, micro-markets such as Hyderabad, Bangalore and Pune may observe a price correction.
A seven percent reduction in GST rates will lead to a monthly saving of Rs 800-1,000 for a potential homebuyer, bearing in mind that a standard ticket size is Rs 2.5 million (affordable homes). The savings could also be range from Rs 2,750 per month to Rs 3,000 per month, considering a standard ticket size is Rs 7.5 million (non-affordable homes). Overall, the real estate sector is witnessing soft demand development mainly backed by a marginal correction in prices and reduced tax burden.
Also, it is analysed that Tier II and III cities would benefit more than Tier I markets since doorsill altitude for rates is lesser in such markets. For instance, a seven percent cut in GST for Rs 45 lakh house reduces the net value of the property by Rs 3 lakh in Tier II and III cities. This is a major reduction in property values and would boost the realty sector, mainly in the markets closer to Tier I cities. Realtors with finished inventories will also be in an enhanced position in terms of inventory off-loading when compared to those with under-construction projects, since the demand is determined by end-consumers who are reluctant to project risks.
Although, only time will get us clarity on as to how the move will be beneficial for consumers and builders. But as of now, it seems to benefit the sector and all its stakeholders.