The 56th GST Council meeting introduced a series of reforms under what is being called GST 2.0. The changes focus on three main priorities: offering some relief to consumers, supporting labour-intensive sectors, and aligning policy with broader national interests.
The Council’s measures are intended to simplify the indirect tax structure, make compliance less cumbersome, and improve the overall ease of doing business. They emphasise rationalising GST rates across goods and services.
Standalone homebuyers: Immediate gains
For individuals constructing standalone homes, the impact of the rate cuts is both significant and imminent. While the labour component of construction contracts has always been exempt from GST, the reduction in GST on cement from 28% to 18% is a game-changer. Cement typically accounts for 20% of total construction costs, and this rate cut could translate into a 2% overall savings for the common man.
Further, materials like sand-lime bricks and wood-based products have seen their GST rates drop from 12% to 5%, which together represent another 5–10% of construction costs. These further offer meaningful cost optimisation opportunities.
According to recent real estate reports, the majority of housing stock in India still comprises individually constructed standalone houses, especially in rural and peri-urban areas. Accordingly, as long as houses under self-construction remains prevalent, this change could offer meaningful relief for the common man.
Apartment buyers: A more nuanced impact
For buyers of apartments developed by builders, the scenario may not be as simple. Most developers operate on a turnkey model, engaging contractors who procure materials—including cement—and execute construction. These contractors typically avail input tax credit (ITC), presently at 28% and offset it against their 18% GST liability, effectively neutralising the higher rate.
Thus, for developers who outsource procurement, the reduction in cement GST may not lower apartment prices, as the tax cost was already mitigated through ITC. However, in rare cases where developers procure cement directly, the lower GST rate could reduce their tax outflow.
Yet, this raises a critical question: Is there a legal or moral obligation to pass on savings arising on account of lower tax outflow on procurements to buyers? The government has signalled a trust-based approach in lieu of a formal anti-profiteering mechanism. Developers now face the challenge of interpreting legal expectations, managing buyer expectations, and documenting their rationale for any pricing decisions. This ambiguity prompts several considerations:
- Should procurement savings influence pricing models?
- How should developers justify their stance if challenged?
- What are the reputational risks of not aligning with the government’s intent?
These questions are especially pertinent in a market increasingly focused on transparency and affordability.
Commercial leasing: In the commercial leasing space, the dynamics mirror those of apartment development. Developers typically engage contractors who absorb the GST on cement and charge 18% GST as works contract services. Therefore, the rate cut on cement is unlikely to affect lease rentals, unless developers procure materials directly.
Unresolved sectoral issues: While the rate cuts are a welcome move, the industry continues to seek clarity on long-standing issues, including GST credit eligibility on construction-related procurements.
Though these issues may not directly affect the common man, they influence housing and leasing costs, contributing to inflation. Stakeholders had hoped for a more comprehensive sectoral review, which may still be on the horizon.
Conclusion
The GST rate cuts on construction inputs represent a positive step toward rationalisation. Individual homebuilders stand to benefit directly, while apartment buyers may or may not see cost reductions depending on the developer’s procurement model. With the government opting for a trust-based regime, the onus is now on the industry to uphold principles of fairness, transparency, and affordability.
Jayashree Parthasarathy is tax partner, EY India. Ketan K Lohia, tax director, EY India, also contributed to the article.