Santhosh Kumar, CEO – Operations, Jones Lang LaSalle India
The decision by the Government to impose value added tax (VAT) on developers operating in the state of Haryana is likely to push the overall pricing of developed units higher. Given that this additional financial burden will in all probability be passed on to the consumers, demand elasticity may be adversely affected. This could potentially lead to postponement of purchase decisions by end users.
The current real estate market scenario in Haryana is not amenable to this move. Property prices in the state are holding out and loan rates (and consequently EMI levels) are unlikely to come down in the near future. We can definitely expect there to be downward pressure on demand. While the state Government may be able to generate additional revenue, this may not happen at the expected pace, given the market absorption being currently observed.
Developers all over the country pay VAT through its imposition on the construction materials like cement, sand, steel, etc. Haryana already charges different VAT rates on construction material. In this new initiative, the Government is proposing a two-way payment of VAT:
- The developer can pay VAT at the rate of 4% on project cost, which will include material, land and labour, or
- He can pay VAT against the bills generated on the purchase of cement, sand, steel and other construction materials used in the project.
The state of Haryana is now also levying an additional tax burden on all developers who build houses for buyers who have an annual turnover of over Rs. 5 lakh. This will more or less cover within its ambit most developers, builders and promoters.
Adding an additional cost burden on developers and contractors will have a cascading effect on the overall project costs. In the current situation, developers are struggling with decreased project sales, and matters are not helped along by high interest costs and high project prices. In other words, this will further slowdown the sales momentum in the state’s housing sector. There is, of course, a potential opportunity for developers, as they may be in a position to bear this additional tax burden while keeping their price constant. This would improve the competitiveness of their projects.
However, it is far more likely that these added costs will be passed on buyers, who are already struggling with high residential prices in cities like Gurgaon. This measure will make the otherwise relatively affordable realty market in Faridabad and Greater Faridabad costlier and less competitive vis-à-vis Noida and Greater Noida – areas that will not be affected by this move by the Government.