Demand for residential properties is expected to receive a major boost following the government’s decision to cut the goods & services tax (GST) rates for underconstruction projects to 5% from effective rate of 12%. In a major push to stated objective of ‘Housing For All by 2022’, the government has reduced GST to marginal 1% for affordable housing while revising the definition of such homes.

Prior to this, under-construction residential properties attracted rate of 18% and effective rate of 12% after factoring one-third abatement for the value of land. The effective GST rate for affordable housing was 8%. Ready properties that have received occupancy certificate (OC) do not attract GST.

The government is focused on its agenda of pushing affordable homes, which is visible in the decision to reduce GST to a mere 1% for this segment. Lower tax burden on home buyers is expected to push demand in the segment which, in turn, will keep developers committed to build more affordable homes.

The decision is expected to help the government steadfastly move towards achieving its target of Housing for All 2022.

“The reduction of GST on Affordable Housing to 1% is a revolutionary move for Indian real estate. This move is a significant triumph for home buyers and will play a huge role in boosting their sentiments,” said Jaxay Shah, National President of realtors’ body the Confederation of Real Estate Developers Association of India (CREDAI). The reduction in the GST for under-construction projects is the most decisive move that will stimulate the demand and sales. This move will give the necessary fillip to the demand in under -construction segment, which has been suffering from low sales levels for last many quarters.

“The elimination of input credit tax benefit may hit profitability for the supply side; however, the potential demand generation as a result of this move will far outweigh any negative aspects leading to greater sales numbers and revenues,” said Shishir Baijal, CMD, Knight Frank India.

He estimates that the reduction in GST can potentially reduce the buyers payout by 6% - 7% on the overall purchase, depending on the category. The consequent accelerating sales will bring down the unsold inventory which has been afflicting the real estate sector.

“As the definition of affordable housing is widened, more builders can mobilize projects across the country, and aspiring home buyers now have a wider and better range of options to choose from,” said Gagan Banga VC and MD, Indiabulls Housing Finance.

According to experts, the reduction in GST rates with expanded definition of affordable housing, coupled with incentives proposed in the budget and the reduction prime lending rates by the Reserve Bank of India, supports the sops for the residential real estate market. The much-awaited reduction in GST has prompted homebuyers to defer their decision for the last two months.