Does the GST cut on Real Estate really benefit you?

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The latest recommendation about GST for under-construction residential houses to be lowered to 5 percent from 12 percent and 3 percent, in case of affordable housing category, has been met with optimism from all quarters. The recommendation also said in both cases, the input tax credit cannot be claimed. Real estate experts all around are welcoming this decision and the overall feeling is that the homebuyer would be benefited by this cut down in GST. While the recommendation might take some time to be implemented and there may be some changes in the same, here are our observations about the rate cut being a boon or bane to the homebuyer in general. Existing GST burden: Take an example of a home that costs the builder ₹100,000/-. Let us imagine the profit on the house is at 15%, which gets added to the cost of construction. So the total cost goes up to ₹115,000 (profit of ₹15,000).The average GST on materials needed for construction ranges at 18%. Now adding 18% as an average GST to the total cost would add ₹18,000 to the cost. Customers are currently charged at 12% GST (amounting to ₹15,960) which is, in turn, claimed as credit by the builder. This means the amount of ₹15,960 paid by the customer is credited back, making the effective cost to the homebuyer at ₹133,000. GST burden as per new recommendations: As per the current recommendation, the changes to the above calculations would be as follows. If we retain the cost of goods and services at ₹100,000/- the average of GST on materials remains same at 18%, profit to the builder at ₹15,000, the total cost for the homebuyer before the GST would be at ₹133,000. As there is no input credit to the builder, as suggested, the new GST of 5% which amounts to ₹6,650/- is added to this. This makes the final cost to the end customer at ₹139,650, which means the additional burden to the end customer is ₹6,650/-. In the first example, the GST was 12% with input credit and end customer was paying ₹133,000/- and the profit to the builder was ₹15,000/-. However, with the new recommendation, the homebuyer is thrust upon with an additional burden of 5% in normal cases and 3% in the affordable category! This means the end customer is paying 6650/- more while the builder’s profit is at 15,000/-. Common man’s question: While most of the experts are welcoming this recommendation, we are trying to understand how will this help the homebuyer. Is it really benefiting the end customer or will she end up paying more? While the government might want to relook at this recommendation and reconsider, the dilemma still lingers. Tell us what you think of the new recommendation in the comments below.