HomePress ReleaseBusiness Line: GST takes sheen off under-construction properties

Business Line: GST takes sheen off under-construction properties

Sales fall by 30% since the implementation of the new tax regime, says report

Goods and Service Tax (GST) has pulled down sales of under-construction properties by 30 per cent since the new tax regime was implemented last July. In contrast, sales of ready-to-move-in properties has increased by about 20 per cent in the last one year as they don’t attract 12 per cent GST, according to data from realty research firm PropEquity.

“There are more back-end sales of completed properties now than front-end deals of under-construction projects, especially where a building is 50 per cent complete. The reason is that at that time, the payment requirement is much more and people want to avoid paying GST,” Niranjan Hiranandani, co-founder and MD of Hiranandani Group and President of NAREDCO, told Business Line.

A house with ₹1-crore tag will attract a GST of ₹12 lakh if bought before it receives occupancy certificate and none of it when it is ready-to-move-in. “Only those booking in the very early stages of a project are willing to pay GST as they get the benefit of payment in installments of two or three years during the construction period. Those who are buying for occupation within 12 months will wait for OC to avoid paying GST,” he added.

According to PropEquity data, sales of under-construction properties over a year away from completion have dipped by 43 per cent in Chennai followed by 34 per cent in Hyderabad, NCR 33 per cent, Kolkata and Bengaluru 32 per cent, Pune 30 per cent and Mumbai Metropolitan Region (MMR) 20 per cent. In contrast, the sales in ready-possession properties is up by 34 per cent in Kolkata, Bengaluru 33 per cent and NCR 26 per cent.

Other factors at play

PropEquity CEO Samir Jasuja, said while GST has led to a substantial price differential, it was not the only factor behind this change in consumer behaviour. “There is no execution risk and that’s a major motivator. Secondly, in under-construction properties, buyer ends up paying both EMI and rent till possession. They can avoid it by moving into a ready property,” he added.

Pankaj Kapoor, founder and MD of Liases Foras, said in many cases, developers were taking on the GST burden and that was driving sales of older properties. “Also new launches are being offered at disruptive prices, making them more attractive than ready-possession properties. That is helping generate buyer interest in the market,” he said.

Builders bearing the brunt

This change in buyer behaviour has adversely affected developers.

It implies a higher need to raise funds because users are now less willing to opt for buying mid-way into construction, which was a source of capital for builders earlier.

“Real estate market is under pressure as capital requirements have gone up after RERA and GST,” said Hiranandani.

Under RERA, builders have to escrow 70 per cent of the building construction money, which cannot be diverted to any other building even in the same project. This reduces the flexibility of developers to play around with the capital in an already tight market condition.