Have you already purchased a home before the 1st of April? If the answer is yes, then you would naturally be in the entire debate regarding the applicability of the new GST norms to properties that have been purchased earlier. As per experts, real estate developers can choose between the previous and new GST rates for existing projects that they have under construction. Additionally, new under construction projects that are launched from the 1st of April, 2019, onwards, will have to comply with the new rates of GST.
Several homebuyers who had purchased properties around 6-8 months earlier were delighted when the GST Council confirmed the reduction in rates of GST from 12% to 5% on under-construction properties and from 8% to 1% on affordable housing projects. However, these buyers may be in a quandary since the GST Council has reportedly agreed to offer scope to real estate developers with regard to imposing GST on properties which are already being developed.
In case of regular housing projects, real estate developers may choose the previous GST rate of 12% with ITC (input tax credit) or the new GST rate of 5% without input tax credit that was confirmed on the 24th of February, 2019 as per reports. In case of affordable housing projects, real estate developers may go with 8% which was the existing rate earlier or select the new rate of 1%. The old and new rates come with and without ITC (input tax credit) respectively. The new GST rates will be applicable for new projects from real estate developers that are announced from the 1st of April, 2019, onwards.
Real estate developers can choose between the new or old GST rates in case of only existing projects under construction. New under construction projects will naturally have to go by the new rates of GST. As a result, developers were given the option by the GST Council with regard to levying their preferred rates out of these two options on earlier projects under construction.
Key Aspects to keep in mind
GST will be applicable solely for projects under construction. As per the latest announcement from the GST Council, the lower GST rates come without any input tax credit or ITC for real estate developers. However, the input tax credit will enable companies to lower the GST amounts paid on raw materials or inputs from the GST amount that has to be deposited in case of the output. This lowering of GST expenditure has already been passed to the buyers of homes.
Since real estate developers have mostly passed on benefits of input tax credit (ITC) to homebuyers in case of existing properties under construction, the new rate of GST will be affecting the overall profitability and costs. Real estate developers are thus positive about the new decision of the GST Council to give them a choice. This is hugely beneficial for real estate developers who have already factored in the sales price post taking input credits into account and have already passed on the benefits to their buyers. This indicates that most real estate developers will be going with the previous GST rates for their ongoing projects in order to keep losses at bay. In case of older properties, real estate developers are expected to take this decision and hence existing customers may not get the benefits that they were previously expecting.
In case of new projects that are officially launched post April 2019, real estate developers will not be able to exercise any choices with regard to GST rates. They will have to abide by the new GST rates and prices will naturally change for projects throughout the country. This change in GST rates, according to experts, may work towards reducing realty prices in key cities like Delhi and Mumbai although it may not be as beneficial for homebuyers in cities like Bangalore. Real estate developers will have to swiftly intimate price reductions to their customers at the moment and they also have to work for internalizing all system related changes including overall documentation and IT for adhering to the 1st April deadline.
They also have to decide quickly regarding their upcoming and new real estate projects since customers will naturally be hoping for lower prices overall. The basis or framework behind the revised prices should also be clearly delineated to prospective customers as per experts.
What existing buyers can expect
Existing buyers of homes will either get the benefits of lower GST by way of the new rate or pay the older rate. It all depends on the real estate developer basically and the financial dynamics of the ongoing project in question. Existing homebuyers at under construction projects were happy with the announcement made previously by the GST Council to lower rates. However, they would have certainly benefited if it was made compulsory for builders to charge only the new GST rate from existing customers at under construction projects. As a result, existing homebuyers would have been paying only 5% and 1% as GST for under construction and affordable properties respectively.
However, they are likely to be charged 12% and 8% for under construction and affordable housing projects by real estate developers which are the older rates of GST. Real estate developers are not likely to go for the new and lower rates on the instalments which remain for existing homebuyers at under construction projects. Developers that have handsome sales volumes may look to maintain the earlier rate framework for keeping profitability levels intact as per experts.
Some real estate developers, however, may look to clear off current stocks/inventory and may choose the new GST rates in order to draw a larger number of homebuyers for the same. Projects which are witnessing lower sales volumes may see real estate developers going with the new GST rates. They may feel that the high demand arising from such a move will offset the impact of zero input tax credits on their margins as per experts. As a result, it can be said that those looking to buy apartments now, i.e. from 1st of April, 2019, will be getting benefits of lower GST while existing homebuyers are unlikely to get the same although a few developers may offer lower rates to spark higher sales volumes.
