GST 2.0 to lower construction costs by 3.5-4.5%, may boost homes affordability: Crisil Intelligence

With the implementation of GST 2.0, construction costs are expected to come down by 3.5-4.5% according to a Crisil Intelligence report. A reduction in GST rates on cement is set to lower raw material expenses for developers, thus, improving their margins and cutting project costs.

“GST on cement has been cut from 28% to 18%. This will bring substantial savings on construction cost. Cement being one of the most critical cost elements accounting for 25–30% of raw material expenses, the cut is expected to improve developer margins and lower project costs,” the report stated.

Other raw materials that have seen a GST rate cut, under the next generation of GST reforms approved by the GST Council, include marble and travertine blocks, granite blocks, sand lime bricks, and stone inlay work. These items will be subjected to a 5% GST, down from 12% in the past, from September 22.

These reductions in GST rates are expected to reduce costs for ‘mid-range and premium projects.’ These construction raw materials including cement account for more than half of the overall construction cost for builders, the report revealed.

“The 10-percentage-point reduction in GST on cement is estimated to result in a 3.0-3.5% savings on overall construction costs, and the rate revision on marble, granite and related inputs an additional 0.5–1.0% (depending on the project segment and material mix),” the report stated.

Meanwhile GST rate on steel has remained unchanged at 18%.

As input costs decline, developer margins are set to improve. Crisil Intelligence highlighted that as a result it depends on developers if they intend to pass on part of this benefit to buyers. This remains pertinent because GST rates applicable on property segment have not been revised, the report pointed.

“With no change in property GST rates, buyer sentiment remains unaffected, avoiding confusion or deferment of purchase decisions,” the report said.

Thus, a reduction in construction cost will improve affordability only when these benefits are passed on to final buyers by the developers. Additionally, as supply side gets a boost, improved margins may encourage developers to launch more affordable projects.

“This will improve project viability, support developer margins, and—if partially passed on—enhance affordability of homebuyers. Supply side gets a boost: Improved margin outlook may encourage developers to launch new projects, especially in affordable and mid-income segments,” the report said.