There
has been a prolonged flip-flop in progress with regards to the VAT issue, and
the matter was sub judice for quite a while. Earlier, VAT was proposed to be at
5% of the value of residential properties, but was lowered
to 1% and has now been fixed at 5% after all. This will have an obvious
negative effect on buyers, because developers are bound to pass the added cost
on to them.
In cities like
Mumbai, this definitely does not spell good news in a real estate scenario
which is already defined by high inventory pile-ups and reduced sales.
On the one hand,
the market was awaiting new policies that would aim to boost flagging home
sales. However, the Government’s need to ramp up its fiscal deficit by
generating additional revenue seems to have gained the upper hand.
Buyers
who had purchased their residential properties in 2006 would
have taken possession of their homes by now and would not be affected. However,
those who had made their purchases in under-construction projects in 2010 and
have not yet received possession will have to pay 5% extra on the final amount.
In some cases,
developers have protected their customers from possible VAT-induced price
escalations by specific clauses in the agreements, but such incidences are
exceptions rather than the rule.
In our view, this
ruling will probably lead to a higher degree of disputes between buyers and
developers, but will not necessarily result in cancellations. In certain areas,
there may be viable alternatives to new constructions available on the resale
properties market. If such options exist, buyers can definitely consider those
options.
