GST rate cut propels demand for under- construction homes

The central government’s decision to reduce the goods and Services Tax(GST) on the aff0rdable housing projects and under-construction properties is likely to trigger residential demand countrywide.

The Real Estate(Regulation and Development) Act (RERA) 2016 acted as a significant catalyst in reviving the residential demand which received a below post the demonetization move in November 2016. This was subsequently followed by the implementation of Goods and Services Tax(GST), Which tilted the home-buyer demand significantly towards the ready-to move projects. Delayed project deliveries on account of lack of funds with the developers and untimely approvals of from the government authorities coupled with the liability GST made home-buyers wary of the under-construction segment. Consequently, home buyers either refrained from investing in the sector of preferred ready-to move units, even if meant paying a higher price. Overall, the under-construction developments experienced a strong jolt of lackluster demand and inventory glut in the preceding two years.

However, the dynamic are expected to change post the recent announcement by the GST council to lower the Goods and Services Tax(GST) on under-construction units to one percent in the affordable segment and to five percent for other categories comprising mid-income, luxury segments.

As per the recently conducted twitter poll, 43 percent of the respondents are willing to purchase a home after the tax reduction. The altered scenario is expected to push the demand for under- construction units across the country, particularly Tier cities such as Pune, Mumbai and Bangalore which reel under the immense pressure of ground-level inventory stock. The announcement also comes in favor of developers who have stalled their project owing to the paucity of funds. The augmented demand would imply increased liquidity flow into the realty sector which otherwise has been facing server funding issues due to limited loan disbursals by the financial institutions.

Besides the government’s decision to extend the tax benefits of affordable housing to the properties priced within RS 45 lakh, both in metros and non-metros, is also a significant step in pushing the sector’s demand ahead. While 43 percent of responders were optimistic of homebuyers after the cut, a significant chunk of 31 percent was reluctant to indulge in property purchases. The trend is anticipated to emerge from the elimination of input Tax Credit(ITC) which implies that developers who wish to avail the benefits of lowered tax will not be allowed to offset the taxes paid on the purchase of construction raw materials such as steel and cement against the final taxes paid on the under-construction units. Resultantly, developers will pass on the burden of unregulated tax to the end-customers, thereby increasing the property prices. Therefore, buyers either wish to withhold their purchase or defer till future price cuts are announced. Furthermore, 26 percent of the respondents who voted “maybe” could be the potential buyers who are currently in the wait-and- watch mode but might trade in the near future if the announcement fares well for all stakeholders.

Although the real benefits of the announcements can be gauged only after they become effective on April, the market looks positive with buyers being enthusiastic about leveraging the benefits of GST rate cut.