GST rate on homes: Most builders opt for 12% GST for ongoing projects

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Published: May 16, 2019 1:59:38 AM

Most real estate developers have opted for 12% GST rate for housing units in ongoing projects as it allows them to retain their profit margin due to availability of input tax credit (ITC), analysts said.

Earlier this year, the GST Council had decided that all new regular projects launched after April 1 would charge 5% GST to buyers

Most real estate developers have opted for 12% GST rate for housing units in ongoing projects as it allows them to retain their profit margin due to availability of input tax credit (ITC), analysts said.

Selling houses at 5% GST without any ITC would force builders to hike prices — as blocked ITC becomes part of cost — which could turn away buyers in the already-subdued market.

Earlier this year, the GST Council had decided that all new regular projects launched after April 1 would charge 5% GST to buyers, but builders can’t avail themselves of ITC. For affordable housing units, the rate was slashed to 1% from 8% earlier. However, for ongoing projects, the Council allowed developers to choose between old and new rates by May 20.

“Nearly all real estate firms have decided to charge 12% as the value of ITC is substantial. However, some builders are extending discounts to the extent of 10-12% to appease buyers, as it is still turning out to be over 10% more profitable than implementing 5% GST without any ITC,” Rajat Mohan, partner at AMRG & Associates, said.

Moreover, many builders had already fixed sale prices of housing units in a particular project by factoring in the entire input credits. A change in the rate now would involve elaborate retrofitting, thereby creating more confusion for buyers, experts said.

Anuj Puri, chairman of ANAROCK Property Consultants, said discounts on offer depended on several factors including slower sales volume in certain projects.

“Moreover, some builders who had accumulated the input stock for their projects much earlier can afford to offer discounts, and to take a slight cut in their profit margins to increase sales in their project rather than holding on to unsold stock.

The subdued housing market will ensure that discounts continue for ongoing projects and a lower profit margin for builder for new projects as they would implement 5% GST rate and forgo ITC. However, as sales momentum improve, builders are likely to raise prices by 3-5% to account for lower profitability due to unavailability of ITC.

“Builders are facing a double-whammy because housing sales are just beginning to see a rise and higher prices mean testing the currently fragile market sentiments,” Puri said. He added that a builders who have already bought raw materials for new projects would see their input costs increase by 5-10%, as steel and cement (28%) continue to have high GST rates while the benefit of ITC has been withdrawn. According to the GST Act, housing projects where completion certificate has been obtained doesn’t attract any GST.

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