GST: How will it impact the property prices in India?

The real estate industry amounts to 5% of India's GDP. It is considered the second largest employer in the country. It is also the area which had a complex tax structure prior to GST. Now that the rates for different industries has been announced and GST implemented, property buyers and developers are waiting to see how GST is going to affect property prices.

Impact of GST

The GST for under construction properties has been finalized to be 12% and ready to move in properties will not fall under this bracket. This is a little higher compared to paying indirect taxes like excise duty, value-added tax and service tax which is totaled to around 11% excluding stamp duty. Though it looks like the tax has increased, buyers did not have the advantage of input tax credits transferred to them by the developer. As a regulatory measure, the government has included an anti-profiteering clause in the GST bill under section 171 of GST law. The clause states that it is mandatory to pass on the benefits tax reduction due to input tax credit to the final customer.

Advantage for property developers

The property developers will enjoy the input tax credit they pay on materials and labor used for construction. The major materials used in construction have seen very slight changes in tax due to GST where:

•    Cement – 28% under GST, which is higher the current average tax rate of around 20-24%
•    Iron rods and pillars – 18%, which is close to the average rate of 20 percent under the old taxation regime
•    Paint, wall fittings, plaster, wallpaper and ceramic tiles – 28%, which is close to the previous average rate of 20-25%
•    Sand lime bricks and fly ash bricks – 5%, which is lower than the previous rate of 6%

With the expected reduction in transportation/logistics and fuel cost, this change in tax rates will only improve the margin made by developers. The property prices for under construction and new projects are expected to slightly decrease with all these benefits.

Advantage for buyers

In the earlier regime, buyers had the problem of indirect taxes which was very difficult to calculate and many buyers did not know the tax rates in their states. This lack of transparency hampered the sentiment of buyers. Also with the emergence of Real Estate and Regulation Act (RERA), the builders are forced to take accountability for any real estate issues.

Now GST and RERA has created that transparency that the buyers want and expect a full breakdown in the property prices.

Verdict

The jury is still out on the impact of GST on property prices but expected to decrease slightly by the end of 2017.