New Delhi [India], September 5 : Rationalisation of tax rates on construction material is expected to cut the construction cost for the real estate sector by 3.5 to 4.5 per cent, according to a report by Crisil Intelligence. The government has announced to cut GST rates on cement, marble, granite, sand, bricks, etc substantially, which is likely to reduce construction costs for builders.
"The construction cost is estimated to decline by 3.5-4.5 per cent. This will improve project viability, support developer margins, and (if partially passed on) enhance the affordability of home-buyers," noted the report
The report noted that the rates applicable to affordable housing (1 per cent), under-construction properties (5 per cent) and completed properties (exempt) remain unchanged. The status quo offers stability for both developers and homebuyers.
In the construction materials segment, GST on cement has been cut from 28 per cent to 18 per cent. Lowering the GST on cement and other inputs directly reduces project costs. Developers may choose to pass on part of this benefit to buyers, improving affordability.
"Cement, being one of the most critical cost elements accounting for 25-30 per cent of raw material expenses, the cut is expected to improve developer margins and lower project costs," the report noted.
GST on steel remains unchanged at 18 per cent, and hence the impact is nil. GST on marble and travertine blocks, granite blocks, sand lime bricks/ stone inlay work has been reduced from 12 per cent to 5 per cent, offering relief particularly to mid-range and premium projects, where these materials are widely used.
The report stated that, "The reduction is also expected to improve developer margins and lower project costs. Construction materials typically account for 50-60 per cent of the overall construction cost for builders."
An improved margin outlook may encourage developers to launch new projects, particularly in affordable and mid-income segments.
The 10 per cent reduction in GST on cement is estimated to result in a 3.0- 3.5 per cent savings on overall construction costs, and the rate revision on marble, granite and related inputs is an additional 0.5-1.0 per cent, depending on the project segment and material mix.
Assessing the sectoral impact, the report points to stability for buyers. "With no change in property GST rates, buyer sentiment remains unaffected, avoiding confusion or deferment of purchase decisions," it said.
However, the impact is likely to vary across affordable, mid-income and premium housing categories. "Also, whether developers will pass on the benefits to customers will bear watching," the report concluded.
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