Reduced tax rate for real estate sector to bolster consumer sentiments: ICRA

New Delhi: Credit rating agency ICRA said on Tuesday that lower GST rates for under-construction residential properties are expected to improve customer sentiment but the removal of the input tax credit may create short term
disruption in sales and collections from ongoing projects in the near term.

“The earlier GST rates of 8 percent and 12 percent were a dampener for customer buying sentiment during under-construction stage considering the high value of such transactions, leading to the increased preference for completed properties,” said Mathew Kurian, Assistant Vice President at ICRA.

“The revised rates are expected to revive customer interest in under-construction properties. However, in the near term, sales and collections in launched projects are likely to be disrupted by the change in tax computation method, as witnessed during the initial implementation of GST in July 2017.”

As per ICRA’s estimates, assuming an 18 per cent input tax incidence and cost of construction of Rs 2,000 to 2,500 per square feet, if developers are to pass on the increase in cost entirely to customers, there may be an effective increase in total outflow for customers where sale price is up to Rs 6,000 to 7,000 per square feet.

For projects priced higher than this level, due to the inherent valuation of land being higher, the increase in input costs will be more than compensated by the reduction in GST payable, which is calculated on the entire sale consideration including implied land value. Thus, customers in such segments are likely to benefit significantly from the reduction in rates.

“As the shift to the new rates happens, managing customer expectations on the revised pricing in ongoing projects where base price under earlier rates have already been announced will be a key challenge for developers, especially at the lower ticket sizes. However, over the long term, a lower headline GST rate is likely to provide a boost for consumer sentiment and support sales during construction stage as the perceived differential on tax rates between the segments will narrow,” said Kurian.

The GST Council in its meeting on Sunday recommended the reduction in GST rate on under-construction residential properties to 1 percent from 8 percent for affordable category and, to 5 percent from 12 percent for those outside the definition of affordable housing.

These rates will be without input tax credit availability for the developer. Affordable housing has been defined as a house or flat having a value of up to Rs 45 lakh and carpet area of up to 60 square metres (646 square feet) in metro cities (Delhi NCR, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad) and 90 square metres (969 square feet) elsewhere.