GST & Construction Costs: Will Property Prices Really Come Down?

The Goods and Services Tax (GST) is being hailed as a revolutionary tax reform. Provisions under the new tax regime give the developer the benefit of input tax credit enabling the real estate developer to pass on this benefit to the homebuyers. With GST, it is believed that the homebuyers will be able to save some money on the final cost of the purchase. In a previous article, we wrote about the change in these tax rates.

For example, at present excise tax on input such as steel stands at 12.5 per cent and the Value-Added Tax (VAT) is four per cent. Under GST, there would be a standardised rate of 18 per cent. Similarly, while services were taxed at 15 per cent, under the new GST provisions, it is taken at an even ground of 18 per cent. As for the construction activities, service tax at present is 4.5 per cent and the VAT differs from one to two per cent and after GST it would be 12 per cent. As for cement, excise tax came to 12.5 per cent plus a VAT of 12.50 to 15 per cent which would now be standardised at 28 per cent. The developers would benefit because of this standardisation of taxes and the concept of Input Tax Credit.

Understanding property prices

In an interaction with PropGuide, Dr Priya Ranjan Swarup, Director General, Construction Industry Development Council (CIDC) said, "The idea of input tax credit is not very well placed. In fact, this is an area of potential disputes. Enactment of GST and its implications are yet to be understood fully. In essence, the benefits for the stakeholders can only be real if the implementation is flawless, which may suffer many pitfalls owing to the possibilities of lack of understanding on part of the buyer and the developer and a very subjective decision making by the representative of the Government.”

“Prices of materials have relatively low incidence. In fact, if one calculates carefully larger share comes from the cost of land and taxation on finished products,” he adds.

We deconstruct it further for you. If a property costs you Rs 3,000 per sq ft, the cost of construction comes to barely Rs 800- 1,000 per sq ft. The larger part is the land cost and another factor of land cost which is stamp duty and the other taxes that go in with it. While GST may reduce some prices, overall it may push up prices owing to compliance and business costs. If there is a lull in between, work will not move and money wouldn't come in. Hence, according to Dr Swarup, a lot of 'artificial bottlenecks' have been created.

Will the GST era push property prices further up?

Property surveys and reports tracking the housing sentiments of prospective buyers have established that while they are actively researching, they aren't buying. “I was about to finalise a purchase in Gurgaon's prime location in November but with demonetisation, I could not go ahead with the deal. Had I agreed to pay a part in cash, the developer would have returned it to me saying it is not legal tender. Therefore, I consider myself lucky that I did not seal the deal. However, even now when homebuyers were assured that the Real Estate Law would take care of defaulting and unethical developers, GST has been introduced too soon. I am unable to decipher whether prices would go now. Should I have bought a house pre-GST?,” says Keshav Balhara, a resident of Delhi's Preet Vihar.

Talking about property getting cheaper?

If property prices do not go down, developers might have to opt for distress sales, selling properties at throwaway prices and people may take advantage. However, it is not a sustainable situation. “I reckon that with higher taxes on services the net prices shall rise. The only flip side is the distress sale where the developers reduce prices to fulfill their obligations in respect of huge borrowings which are now becoming almost unsalvageable as non-performing assets,” says Dr Swarup.

Another aspect needs to be considered is the depressed sentiments of prospective buyers on account of several reasons. These two major issues might create pull factors,” he adds.

Input Tax Credit is time taking

While prospective homebuyers may be happy about the fact that Input Tax Credit may translate into lower costs for them, the process could be rather long. Besides, in the short-term, unless the developer is willing to compensate homebuyers by giving them discounts from his own pocket, the credit system will not be able to help the end-consumer. Dr Swarup says, “No business would like to do it. Also, compliance costs have increased which means developers anyway have increased business costs so he wouldn't want to take on more.”

Priyajit Ghosh, Partner, Indirect Tax at KPMG lists the following conditions to avail input tax credit.

• Possession of tax invoice
• Receipt of goods/services
• Payment of tax by the supplier
• Furnishing of returns
• Payment to be made for Value and tax within 180 days

​Check out the next stages: While filing returns, the developer has to upload the details of the outward supplies of goods and services pertaining to State while the supplier must upload the details of the outward supplies. Meanwhile the customer would also be uploading details of Tax Deducted at Source (TDS) deducted on payments made. The developer must also list the details of Input Tax Credit distributed to respective locations. Thereafter, the data is validated and auto-flown. Input Tax Credit and TDS is also validated coming from the supplier and consumer side. There is another level of modifications and validations post which taxes and interest is discharged, refunds claimed etc. Clearly, this could get time taking and hence, the immediate benefit of this credit system may be tough to realise.

One year on

We reached out to Dr. Niranjan Hiranandani, President (Nation), NAREDCO to ask him about the status post GST?

What kind of cost increase has taken place?

Construction Cost has been impacted due to the implementation of GST. Initially, suppliers were reluctant to pass on the GST benefits. However, during the course, they have passed on the GST benefits but reduced the discounts that were being passed on. This has reduced the GST benefits.

Has use of flyash or any other material reduced the cost?

Cost of materials has started increasing from past 3 to 4 months by around 10 per cent. Yes, use of fly ash helps in cost control.

What has been the increase in the cost of labour?

Cost of labour has increased by around 7 to 10 per cent.

Mumbai is home to more billionaires than any other city in India as per the New World estimates. Given the property prices in Mumbai, it may seem that the city is a rich man’s paradise and indeed it may not wrong to say so given that the cost of constructing a house in Mumbai is the highest in India. A cost correction with some modifications to GST might make the city

Also Read: Will GST Empower Homebuyers To Strike A Better Deal?