Indian real estate builders welcome GST relief but opinions are divided

• Tax rate on residential buildings and affordable housing units has been cut
  
• This may boost the sentiment among developers and middle class consumers in urban India.
  
• However, realtors believe this may not be enough for a long-term revival of the sector
  

In a bid to boost the housing market and curry favour with homebuyers and real estate developers ahead of national elections, India’s Goods and Services Tax (GST) Council voted on February 24th to cut the tax rate on residential buildings and affordable housing units.

Starting April 1, under-construction residential properties will be taxed at 5% under India’s GST regime as opposed to a current rate of 12%.

“The move gives the beleaguered realty sector the much-needed breathing room and will certainly help it maintain some forward momentum in 2019,” Anuj Puri, Chairman of Anarock Consultants, said in a statement.


Similarly, affordable housing units - the definition of which encompasses all homes that are less than ₹4.5 million - will be taxed at a mere 1% instead of 8%. 34% of all under-construction homes in India’s top seven cities are priced below ₹4 million, according to Anarock data.

This will be a huge relief for middle class consumers in urban India. In terms of size, this includes homes that are 60 square metres at the most in metropolitan cities and 90 square metres in non-metropolitan cities. “ The GST cut, coupled with this critical change in definition, will induce more sales in homes falling in this budget range – a win-win for both builder and buyers,” Puri said.

The move is a calculated ploy to stimulate demand in the real estate sector. Developers are struggling with a record number of unsold houses, having lobbied the government for a rate cut as a result.

In fact, the growth of the real estate sector hinges on the affordable housing market, which saw a 22% jump in sales in 2018. Meanwhile, the under-construction property sector has struggled with low sales for the past few quarters.

However, this may not be enough for a long-term revival. “The industry now looks forward to proactive solution to the underlying issues that the sector faces. Until then, even small booster shots in sufficient numbers can help incite positive sentiment and developers can now look forward to some improvement in their balance sheets,” Puri said.

Realtors have one of the many casualties of the liquidity crisis in the non-banking financial sectors, having struggled to refinance their existing loans - which leads to lower borrowing costs.

“The cut in GST for low-cost housing of small dimension dwellings will be a sentiment booster in the near term, even as the overhang of unsold inventory remains a worry in regular sized properties,” Vijay Bhambwani of bsplindia.com told Business Insider.

On the upside, as homebuyer costs will decline considerably, the increase in sales of unsold units is estimated to outweigh the resulting decline in developers’ margins, according to Knight Frank, a real estate consultancy.

The GST Council has slashed rates on a number of items in its last few meetings. At the end of December 2018, the rates on 22 items were reduced. Seven commodities including cameras and farming implements, were taken off the 28% slab - the highest rate. At the meeting, the GST Council said it would review the rate on under-construction units.



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