Real estate firms gear up to pass on tax benefits

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Real estate firms are gearing up to pass on tax benefits to homebuyers under the goods and services tax (GST) regime, which could lead to marginal changes in property prices. Depending on the stage of construction and location, home prices may either see a correction of up to 3% or inch up a bit from current levels, say property advisers and developers.

However, prices of ready-to-move-in apartments with completion certificates would remain steady as these properties are out of the GST ambit. Any price change in the segment will depend purely on demand and supply, say sector experts.

On 1 July, Mumbai-based property developer Oberoi Realty Ltd launched a marketing campaign called “Zero GST Impact”, cashing in on the uncertainty over how the new tax rate may affect property prices. The company kept the earlier tax rate for the first 100 bookings in six of its under construction projects following the GST rollout.

Oberoi Realty managing director Vikas Oberoi clarified that buying homes would not become more expensive after the application of GST as the company plans to pass on tax benefits to both existing and new customers.

Under the new tax structure, buying under-construction properties will attract a net effective rate of 12% as against the earlier rate of around 5.5% (including value-added tax and service tax). However, due to the input credit benefits that most builders will get on the key raw materials they buy, the base price may go down.

“We have done our math and we clearly believe that GST is not going to increase cost to customers. If we read the finer details, the input credit takes care of the GST that is required to be paid. If everyone plays fair, home prices will mostly be cost neutral or may go up just about 2-3% in (a) few projects,” Oberoi said.

Others also believe that prices of ongoing projects may see a slight correction of about 1-3% post deduction of input credits, depending on location and stage of construction.

 “For new projects with 100% input credit passed to buyer and land cost being 50% of project cost, we expect property price to fall by around 1% in western and northern markets and around 3% in southern markets,” said a 30 June report by Edelweiss Securities Ltd, a brokerage firm.

Om Ahuja, chief executive (residential) of Bengaluru-based Brigade Enterprises Ltd, said homebuyers could save about 3-4% post GST, depending on savings of builders on key components such as steel and cement.

The company is also currently running a campaign where it has cut prices across 22 ongoing residential projects in Bengaluru, Chennai and Hyderabad.

“For our new bookings, we are currently working on how we can pass on the benefits to consumers. Wherever there is visibility of some saving, we have already passed on. We are currently running an offer where we have slashed prices across few projects,” Ahuja said. However, he added that challenges remain on how to rework contracts with existing customers who have paid partly for under-construction projects.

On 15 June, the Central Board of Excise and Customs (CBEC) asked all builders to pass “on lower tax burden under GST regime to buyers of property by way of reduced prices/instalments”.

“The impact on prices will differ for different projects and how much credit a builder can take or not take. Suppose if 90% construction has happened and the builders have already purchased the material, he may not get the credit on that,” said Abhishek Jain, partner, Ernst and Young, a consultancy.

According to Pankaj Kapoor, managing director of Liases Foras, a real estate advisory firm, luxury housing prices will rise while affordable and low-cost housing will not see any impact. “Luxury housing has a bigger component of land price. Input credit will not be sufficient enough to bring down the price,” said Kapoor.

DLF Ltd, India’s largest real estate firm by market value, is also planning to pass on benefits of the input credits it will get on its under-construction projects. However, any price change will be determined by the market rather than GST, said Rajeev Talwar, DLF’s chief executive officer.

“Every builder has to pass on the benefit that they get through input credits. But we need to wait for another six months to see how the market moves based on these reforms to see a price change,” he added.

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