It is said that in India, it is very difficult to escape the impact of GST. Every product and service that you use has a GST component, which goes to the government. However, the government has been careful to ensure that GST does not become burdensome on the lower segments of society as well as on items where the government wants people to spend. One such aspect is GST on home loan, which is a cost to everyone. However, the government has gone out of its way to ease this burden by reducing the current GST rate on home loan.
Remember it is GST on home construction, not on home loan
The GST or Goods and Services Tax is imposed on the sale of property; either fully built or under-construction. In the 33rd meeting of the GST Council, it was decided to reduce the rate of GST for under-construction flats to 5% and for affordable homes to just 1%. These rates have been effective from 01st April, 2019. To enhance the benefits of GST reduction, the carpet area for qualifying as affordable housing has also been made more liberal and we will look at that in detail later. Prior to this change, the GST on all housing projects used to be 12% while on affordable housing projects, it used to be GST at 8%. That effectively means a reduction of 700 bps for regular homes and also for affordable homes.
Does builder get ITC exemption in the event of reduced rates?
The rule is quite clear that the sharp reduction in GST is in lieu of the builder/real estate developer forfeiting the ITC. Input tax credit (ITC) is a value added tax system.
For example, if the current GST rate payable is 12% and you have incurred GST on inputs that go into the current product, then credit for the same is available. This reduces the effective cost and is also fair. However, the explicit condition when the lower rates of GST were introduced was that there would be no ITC.
Now, the government has allowed the builder/developer to select one of the options. They can opt for the reduced rates of GST (5% for all homes and 1% for affordable homes) and forfeit input tax credit (ITC). Alternatively, they can opt for the old GST regime (12% for all homes and 8% for affordable homes) and continue to get input tax credit (ITC). Builders can work out the more economical option.
That brings us back to a very critical question. Does the GST also apply to home loans. There is no GST on home loans since it is not a service. However, any processing charges on home loans or any penalties imposed on home loans would be subjected to 18% GST. For example, in a home loan of Rs50 lakhs, the processing fee would range between 0.5% and 1.0% i.e., between Rs25,000 and Rs50,000. On this amount, the GST of 18% is charged.
Does the GST rate impact the Home Loan EMI?
It does not impact the home loan EMI directly, but indirectly, there is an impact. GST on home loan does not influence the interest rate or the EMI amount of the home loan. However, the rate of GST does impact the processing charges, which are subjected to GST at the rate of 18%. On larger home loans, the size of the processing fee and the GST impact can be quite meaningful.
The real impact of the reduction in GST on homes is likely to impact construction costs, which will be transmitted to the end customer. Since it impacts construction costs, the impact of GST would be felt on the construction and renovation of homes in India. This reduction in GST has certainly made it a lot more affordable for homeowners and future homeowners to undertake construction or renovation projects. The reduced construction costs keep home prices under check and getting home loans is easier.
Quick word on the definition of affordable homes
GST Council has altered the definition of affordable homes. Under the new definition, an affordable home unit would be one with carpet area of up to 60 square metres (SQM) in metros i.e., approximately 646 square feet (SFT). For non-metros, the carpet area up to 90 SQM in non-metros i.e., approximately 969 SFT. Here, the GST Council has classified Bengaluru, Chennai, Delhi-NCR (Delhi, Noida, Greater Noida, Ghaziabad, Gurugram and Faridabad), Hyderabad, Kolkata, and Mumbai (Mumbai Metropolitan Region) as metros; with the rest being non-metros. GST is applicable in India on houses that have been constructed, but not issued completion certificate.