The Goods and Services Tax (GST) has hurt the real estate sector as buyers are postponing purchases of under-construction houses, leading to liquidity crunch for developers.

Developers are forced to scout for fresh capital to complete projects. The luxury housing segment has been the worst-affected since the implementation of the GST on July 1 last year.

Since ready-to-move-in properties do not attract the 12 percent GST, buyers are delaying decision till a building receives the occupancy certificate.

Liquidity crisis

“Real estate market across the country is under pressure due to liquidity issues because the capital requirement has gone up. Developers today need more liquidity than before for completing projects,” Niranjan Hiranandani, co-founder and MD of Hiranandani Group and President of Naredco, told BusinessLine . Pankaj Kapoor, MD at real estate consultancy Liases Foras, said the luxury segment, where prices are higher and land forms a substantial cost component, has taken the biggest hit from GST. The cost of land is not eligible for input credit under the GST because it is an immovable asset.

“Already there was low demand with low investor activity, and the 12 per cent GST has dissipated the leftover energy. In luxury projects, the land proportion is much higher but the construction cost is lower and so the input credit is very low, which does not help developers,” he said.

Moreover, to expect buyers to pay ₹48 lakh GST on a property worth ₹4 crore is unrealistic. “So, many players are developing projects themselves and offering in the market to avoid attracting GST. Overall, it is a loss of margins and capital to the developer,” Kapoor added.

‘Prices not impacted’

Anuj Puri, Chairman, Anarock Property Consultants, said, “Although it was anticipated that the GST would reduce property prices pan-India, we have in fact not seen a significant impact on the ground. If the stamp duty and registration fees were subsumed under the GST regime, we would definitely see the property prices come down.”

While the tax-on-tax has been eliminated with the GST, the overall outgo for buyers seems to have increased as even after passing on of input tax credit they may have to pay 3-4 per cent more than the earlier service tax plus VAT.

Moreover, in the case of projects which were nearing completion close to the GST start date, there has been no significant benefit that the developer could pass on to customers, Kapoor said.

The beneficiaries

The two segments of the real estate sector that have gained from GST are affordable housing and warehousing. “I think the biggest beneficiary is affordable housing, which has a lower GST rate along with interest subvention,” said Hiranandani. Affordable housing attracts only 8 per cent GST and is eligible for interest subvention of up to ₹2.3 lakh, which has given a boost to the segment.

And in the case of warehousing, the GST is playing a pivotal role in boosting the hub-and-spoke model as well as the growth of Multi Modal Logistics Parks.

“The implementation of the GST has had a positive effect on warehousing due to vanishing State boundaries and has made way for cost and operationally efficient hub-and-spoke model,” said Ramesh Nair, CEO and Country Head, JLL India.

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