GST Impact

Home Buyers – Find Out GST Impact on Real Estate/Home Loan Here

Home Buyers – Find Out GST Impact on Real Estate/Home Loan Here

Last Updated : Feb. 25, 2019, 3:31 p.m.

The country has seen the launch of the much-awaited indirect tax reform – Goods and Services Tax (GST). The Prime Minister Narendra Modi, in its speech on Friday midnight, did the honours. The GST is expected to have a major impact on the economy, including the real estate and home finance segment. Even as GST is out, the prospective home buyers are in fix as to what would be the status of the housing sector in general. As you would very well know, the GST is expected to subsume all the central and state government taxes which were getting imposed on real estate earlier.

The GST Council has specified four rates, 5%, 12%, 18% and 28%. However, the council has decided to reduce GST on under-construction residential properties from 5 per cent to 1 per cent, from 12 per cent first time. Let’s see how will GST change the dynamics of housing market and the home loan that the buyers avail to purchase a property.

GST Impact Vs Service Tax & Other Levies

Previously, it’s 4.5% service tax, a VAT of 1%-2% and various other taxes which were levied on buying a property. If we add 5%-6% stamp duty, the tax incidence was at 10.50%-11.50%, which is a tad lower than 12% GST. The GST rate is also applied on the the cost of land. Of the land cost, about 70%-75% of is now allowed as abatement under the composition scheme. The GST says that the stamp duty will also be applicable in addition to 12% rate, taking the overall tax to 18%. In addition, the construction materials like steel and cement will be taxed at 18%, 28%, 28% and 28%, respectively. The same goes with paints and white goods. However, these can be claimed in full via Input Tax Credit (ITC).

GST Tax Rates on Construction Materials

Construction Materials Before GST After GST
Steel 18.1% 18%
Cement 27.7% 28%

Let us understand the complexity of GST tax structure on real estate with an example.

A real estate developer is on the way to complete a housing project. The cost of construction stands at say ₹4,000 per square feet. At 18% rate, the tax collected from the developer would be ₹720. If the sale value of the completed property including the cost of land is ₹6,000 per square feet, the tax liability at 12% then becomes ₹720. Since the construction cost can be claimed in full, the overall tax liability here will be zero. However, if the sale value surges to ₹7,000 per square feet, the tax collected will be ₹840 and the claim can be made to the extent of ₹720 only. So, a fresh tax of ₹120 per square feet would be charged from the developers who would recover the same from the home buyers. So, it all boils down to the sale value of the property and the cost of construction, which actually would dictate the prices of homes in the coming days.

Apply for Home Loan post GST

How Would Affordable Housing Pan Out Under the Impact of GST?

In a bid to promote affordable housing, the government has told builders not to charge any GST from home buyers as the effective 8% GST can be adjusted against the input credit. The Union Finance Ministry has released its statement regarding GST on affordable housing. Take a look.

  • All the input materials and capital goods used in the construction of flats and houses, etc, must bear GST of 18% or 28%. On the other hand, most of the affordable housing projects would now attract 8% GST. This arrangement will help builders or developers do away with the requirement to pay GST on the construction of flats in cash. Instead, the ITC will be enough to pay the GST on output.
  • Builders can’t recover the GST payable on the flats from the buyers
  • Only when the builders reduce the prices of flats after factoring in the full ITC available as per the GST regime can they recover the GST from buyers.
  • GST on under-construction residential properties lowered from 5% to 1%.
  • GST on affordable housing slashed down to 3% from 8%.

What Would be the GST Impact on Home Loans?

The word GST is here not only to influence the housing prices but can also impact the loans that one avails to buy a home. Before sanctioning a home loan, banks, housing finance companies and other financial institutions deduct charges such as processing fee, legal costs, and others. If we talk about the processing fee and other charges, they had service tax earlier, which is now replaced with the GST. Let us glance at the below table to find out the impact GST can have on your pocket while paying these charges.

Table Showing GST Impacts on Home Loan Processing Fee & Other Charges

Charges Charge Structure (Before GST) Charge Structure (After GST)
Processing Fee 0.25%-1% of the loan amount plus service tax of 15% 0.25% of the loan amount plus GST rate of 18%
Prepayment Charges Floating-NIL

Fixed-2%-4% of the principal outstanding plus service tax of 15%

Fixed-2%-4% of the principal outstanding plus GST rate of 18%
Late Payment Charges Amount specified by the lender plus additional 2% interest on delayed payment+15% service tax Amount specified by the lender plus additional 2% interest on delayed payment+18% GST
Other Charges Specific amount+15% service tax Specific amount+18% GST

The GST impact on loan charges is minimal. For example, on a processing fee of ₹10,000, a service tax of ₹1,500 was levied earlier. This would rise to a mere ₹1,800 from July 1, 2017.

The housing sector could see a lot of changes in line with the GST tax rates that are applicable now. As far as loans are concerned, the processing fee would rise, but won’t bother the borrowers much. With the interest rates on a falling spree and expected to go further down, you can plan your home buy a little later.

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