Apr 2018
24

Impact of GST on Residential Property Prices: JLL Report

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Impact of GST on Residential Property Prices: JLL Report Update

With the market opening up beyond state boundaries, GST's immediate benefit to developers is visible in an increase in the credit flow of taxes paid on procurements. Further, the GST law mandates the passing on of benefits arising due to increased credits to customers by way of reduced prices. However, the timelines and manner of computation of such benefits are not clear under the law. Further, with maximum benefits available to projects which are yet to commence and minimum benefits to those nearing completion, it will be an uphill task for developers to compute the overall benefits arising due to GST and the quantum of such value transferable to customers.

A short discussion with developers in Maharashtra revealed their GST wish list:

  1. Align land ready reckoner rates with the actual rates prevailing in the market to arrive at a realistic land cost (GST is levied after one-third deduction for land).
     
  2. Land cost deduction should be allowed on the basis of actual cost of land and not one-third, especially in cities like Mumbai as the land cost is often 50–60% of the total cost incurred by a developer.
     
  3. Instead of applying GST @18% and then availing of input tax credits, a flat rate of 5% without tax credits should be levied.
     
  4. Clearly outline the methodology to be adopted for allocating the input tax credit benefit to the final price of the apartment given the fact that raw material expenses are incurred over an average project life cycle of 4-5 years.

Conclusion:

While GST has simplified the tax treatment for the realty sector and has resolved some of the long-standing issues of valuation, nature of supply, etc., the significant benefit appears to be only with regard to increased input credit on the procurement of materials. The rate of GST on residential contracts has not necessarily reduced to a large extent.

The increase in input credit should ideally reduce the construction cost. However, in an apartment, in addition to construction cost, the land cost also play a significant role. The maximum benefit under GST would be available only to projects that are mostly or entirely executed post implementation of GST. In the case of projects which have already commenced and are nearing completion close to the GST start date, there may not be any significant benefit that the developers can pass on to the end customer. In any case,  for most projects, the estimated benefit may not exceed 3% of the overall construction cost. This benefit may not translate into a significant reduction in prices for consumers.

The effective rate of tax has not seen too much deviation, with the earlier rate ranging from 10–15% and now moving to 12% under GST. Therefore, it may appear that GST would result in savings of at least 3–4% to the end customer; however, the ground-level reality may be different. The cost of land involved in the project would significantly impact the ultimate saving the end customer may derive under GST. In projects where the land cost is low, the savings can be significant and closer to the estimated savings. However, where the land cost is high, the savings on account of GST may not be significant.

In summary, end customers may be technically entitled to some amount of relief, and builders would be better off explaining the rationale behind their position depending on their fact pattern.

Updated: 5/10/2018 11:04:48 PM
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