Merlin Project Updates

GST impact on Real Estate Industry

By: Merlin Group | July 25, 2017

GST has made Buying Residential Property in Kolkata REMARKABLY EASIER and CHEAPER! Here’s how:

July 1, 2017 will be considered as a remarkable day in the history of modern day Indian Economy. This was the day when a major economic reform came into play. Since the economic liberalization of 1991, no Indian economic policy reform has created as much speculation or made as many national and international headlines as much as this reform -The Goods and Services Tax or GST.

What is GST?

While GST is much more complex than what that can be described within a paragraph, but here is a brief idea as to how it is different from the previous tax policy. Until June 30th 2017, India had an indirect multiple taxes policy. GST will end this policy to bring all goods and services under a single tax policy.  It will get rid of taxes such as Excise Duty, Customs Duty, Sales tax, VAT, and CST etc. GST has two components- Central GST and State GST to distribute to revenue amongst the states and the center.

The multiple tax policy had various disadvantages like treating goods differently from services, multiple taxes from the same item and taxing goods differently based on whether the good moves intrastate or interstate. All these made the made pricing much more complex and sometimes resulted in inflated pricing. It also made certain products or services uncompetitive in the domestic market due to various forms of taxes levied on them. With the implementation of GST, all goods and services will be taxed anywhere in between 0 to 28%. Each good or service will have a fixed tax rate under GST based on its type and pricing.

5 Ways GST Makes Buying a Home an Easier, Faster, and Convenient Process

The impact on the real estate market on the short run is expected to be minimal. This is mainly due to the numerous challenges that the developer will face in transitioning to the new tax regime that’ll curb the enthusiasm of property buyers. While the market is in transition, it is expected that the price won’t be vastly different. But before getting too far ahead, let us understand how differently aspect of GST works in the real estate market from the previous system and then draw our conclusions.

  1. Status of Completion to NOT affect tax rates levied on the property:
    Earlier, the status of completion (under-construction versus completed) and the state in which the property is located used to affect the final selling price of the property as well. An under construction site was subject to payment of VAT, service tax, stamp duty and registration charges. In case of purchase of completed properties, VAT and service tax are exempted.  In GST all of these are packaged under a 12% GST rate. Earlier the VAT and service charges alone accounted for 6% of the property cost alone. Accounting all of these, it is expected that property costs will soften by 1-3% especially the affordable and mid-level real estates. Some of these benefits will eventually; definitely be passed on to the buyers.
  2. Property location to not affect VAT, stamp duty, etc
    Tax such as VAT, stamp duty and registration charges were state tax and hence were different for different states. As such property prices were different for different states. However under GST this variation is expected to come down with a much more uniform pricing across the country.
  3. Other costs to either remain the same or reduce further
    The material costs are expected to remain similar as before with cement, marble and granite being taxed at 28% while other building materials being taxed at rates in between 5-12%. This is more or less similar to the previous tax policy. Builders are expected to save some cost on logistics, as transportation cost will be cheaper under GST. Also consumption of building goods from another state won’t be taxed multiple times like before. This will also bring the variation in property prices down by a small margin.
  4. Long-term Wins
    Finally the transparency of taxation is expected to create a favorable sentiment in the market in the long run. This along with lower housing loan rates is expected to push the growth of real estate sector.
  5. Increase in the cost of leasing and renting property will drive demand for purchase
    Under the previous tax policy, residential leasing was tax free i.e. if you leased your property before completion, the certificate was issued to the property; you were exempted from service charges. However under GST, it is not yet clear if residential leasing will be taxed or not. If taxed, expect the house rent to go up. This will surely increase demand for buying a home rather than renting one.  This in turn will drive economies of scale and overall growth of real estate in India, thereby reducing prices.

What else you should know as a Prospective Home Buyer?

A major chunk of the property cost consists of the cost of land. And it is not yet clear what the abatement rates (reduction in tax rates) will be for the land cost in the total price of the end product. Government has listed land as a part of the immoveable property and hence shall be taxed similarly with zero abatement. However builders are arguing against it as it’ll soar up the price of land. There are also other functional changes like forming new business policies and framework, understanding transitional policies. There are also other challenges like redesigning the supply chain, now that taxing each stage of the supply chain is over.

In short, it is difficult to predict the impact of GST in the real estate market within just a month of its implementation. It depends upon how quickly and more importantly how well the market adapts to these changes.

As for the short run, expect a small decrease in price in affordable real estate while the luxury section might be a bit costlier. So if you were looking to buy a home in the MIG or LIG segment, closing your purchase within a month or 2 would be a wise idea!



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