Explainer: How GST cut on under-construction houses will help home buyers

The GST Council's decision will only benefit buyers who are on construction-linked payment schemes.

The Modi government on Sunday announced a cut in the goods and services tax charged on sales of residential properties under construction as it looks to stimulate the economy by driving up consumption.

The Goods and Services Tax Council, comprising central and state finance ministers, announced that the new rate will be 5 percent, down from 12 percent, on all new housing projects except those that are classified as af fordable housing. The council also decided to slash the tax rate on affordable housing projects to 1 percent from 8 percent.However, builders will not be able to claim input tax credit (ITC) under the new GST rates. The new rates will be applicable from April 1.

The Council also made changes in the definition of affordable housing carpet area and cost. Properties costing up to Rs 45 lakh will now be considered as affordable. Houses with a carpet area of 90 square metre in metro cities and 60 square metre in non-metro cities will be considered affordable, the Council said.

Properties, where the construction has been completed, attract stamp duty, not GST. Hence, ready properties that have received the occupancy certificate (OC) do not attract GST.

What does this mean for home buyers?

The GST Council’s decision will benefit buyers who are currently on construction-linked payment schemes.

Demand for residential properties is expected to receive a boost as the lower tax burden on home buyers will push up demand in the segment which, in turn, will keep developers committed to build more affordable homes.

Abhishek Jain, tax partner at Ernst & Young, said the reduced goods and services tax (GST) is good news for the real estate industry as the earlier higher rates were a bit of deterrent for buyers of under-construction properties.

Brokerage firm Knight Frank maintains the reduction in GST can potentially reduce the buyers’ payout by 4-6 percent on the overall purchase, depending on the category. The consequent accelerating sales could bring down the unsold inventory, which has been on the rise for several quarters now.

Shishir Baijal, Chairman and Managing Director at Knight Frank India, said the reduction in GST for under-construction projects is the most decisive move by the council with a clear focus on demand stimulation.

Business Standard