Workers unload reinforcing steel from a truck at the East Kidwai Nagar General Pool Residential Accommodation Redevelopment Project in Delhi, India. (Photographer: Ruhani Kaur/Bloomberg)

Revised GST For Homebuyers May Not Be Such Good News For Developers

Profitability of developers is set to take a hit after the 33rd Goods and Service Tax Council withdrew input tax credit and reduced the tax levied on under-construction projects.

That's according to rating agency Crisil which sees an impact on margins of real estate developers as new rates come into effect from April 1.

The GST Council approved lowering the tax rate on under-construction properties to five percent without input tax credit, from 12 percent earlier. On affordable housing projects, only one percent GST will be levied compared to eight percent earlier.

Construction costs will increase as developers’ margins are unlikely to see any improvement due to the withdrawal of ITC and the prevailing price pressure in the real estate sector, the report said.

The net benefit in terms of ITC determines the actual tax implication for home buyers, the report said, adding that developers will now have to re-calibrate project pricing after the announcement and those not passing on the benefit will have to bring it down by around seven percent. On the flip side, realtors passing on the benefit will have to hike prices by two-four percent to maintain margins which does not seem conducive in the current market scenario, it said.

The withdrawal of ITC is thus set to pinch the affordable housing segment the most owing to the high construction costs in cities. 

The end-user demand, however, may see a marginal increase in the near-term and developers will be in a relatively better position in terms of liquidity, with sales picking up at a gradual pace, it said.

With the Real Estate Regulatory Authority framework evolving and GST rate cut, the end-user confidence towards under-construction properties will improve, Rahul Prithiani, director at Crisil Research, said. “This should also gradually improve volume growth and liquidity of cash-starved developers.”

The government also defined “affordable housing” as residential spaces with carpet area of up to 60 square metres in metro cities and 90 square metres in non-metro cities, with a price label up to Rs 45 lakh.

Also read: Real Estate Stocks Rise On GST Boost As Brokerages See Pick Up In Sales