How New GST Slabs Affect Your Construction Costs
MUMBAI/CHENNAI — In the most significant indirect tax reform for the real estate sector since 2017, the GST Council has proposed "GST 2.0," set to be effective September 22, 2025. The new regime aims to slash tax rates on critical construction materials, including cement and natural stones, to reduce home construction costs by 3–5%. However, industry optimism is tempered by a parallel government proposal to levy an 18% tax on Floor Space Index (FSI) premiums, a move developers warn could negate these savings and drive property prices higher.
The reform comes as a response to a severe contraction in the affordable housing segment. According to data from Anarock, the share of affordable homes in total sales plummeted from 38% in 2019 to just 18% in 2024, largely driven by soaring input costs.
Breakdown of the New Tax Structure
The core of the "GST 2.0" reform is the simplification of tax slabs. The complex multi-tier system has been streamlined, moving major construction inputs into lower tax brackets. This is particularly impactful for individual home builders and developers in South India, where material costs constitute a significant portion of the budget.
Material Cost Changes
| Material | Old GST Rate | New GST Rate (Projected for Sept 2025) | Estimated Price Impact |
|---|---|---|---|
| Cement | 28% | 18% | ₹25–30 drop per bag |
| Granite & Marble Blocks | 12% | 5% | Significant drop in flooring costs |
| Fly Ash Bricks | 12% | 5% | Reduced walling costs |
According to industry experts, cement accounts for 12–18% of the total construction cost of a residential project. The 10% reduction in the tax rate is expected to lower the overall project cost by approximately 3–3.5%. When combined with the reduction in stone taxes, the total cost benefit reaches up to 5%.
The FSI Tax Controversy
While the material tax cuts have been welcomed, a contentious proposal threatens to undo the progress. Reports from December 2024 indicate the government is considering an 18% GST on FSI and additional FSI premiums paid to local municipal authorities.
FSI (Floor Space Index) determines how much construction is allowed on a specific piece of land. In land-starved metros like Mumbai, Bangalore, and Chennai, developers pay heavy premiums to the government to build vertically.
- The Industry Stance: The Confederation of Real Estate Developers' Associations of India (CREDAI) argues that FSI charges are statutory fees and should be exempt from GST.
- The Cost Impact: CREDAI President Boman Irani has stated that taxing FSI could increase housing prices by 7–10%.
- Double Taxation: Developers argue this amounts to double taxation because they cannot claim Input Tax Credit (ITC) on residential projects.
Key Takeaway
If the 18% FSI tax is implemented, it will likely overpower the savings from cheaper cement. A 5% drop in material costs cannot offset a 10% hike caused by land development taxes.
Regional Impact: South India Focus
The impact of these changes varies across different geographies. For the South Indian market, the implications are specific due to local construction practices and material sourcing.
1. Granite Hubs (Karnataka and Tamil Nadu)
Karnataka and Tamil Nadu are key hubs for granite production. The reduction of GST on granite blocks from 12% to 5% is expected to lower flooring costs significantly for homeowners in Bangalore and Chennai. Unlike the North, where marble is often imported, South Indian homes predominantly use locally sourced granite. This tax cut directly benefits the local supply chain and the end consumer.
2. Tier-2 and Tier-3 Expansion
In metros like Mumbai or Bangalore, land costs (and FSI charges) make up a huge chunk of the property price. However, in Tier-2 cities like Coimbatore, Mysore, and Kochi, the construction component (materials + labor) is a larger part of the total cost than the land value.
Therefore, the cement tax cut will be felt more positively in these smaller cities. The threat of FSI tax is less severe here compared to high-density metros.
3. Monsoon Construction (Kerala and Coastal Karnataka)
Coastal regions require specialized, higher-grade cement to resist corrosion and moisture. These premium cements are more expensive. The ₹25–30 reduction per bag provides substantial relief for homeowners in Kerala, where construction costs are traditionally higher due to terrain and labor rates.
For a detailed understanding of how different building materials like bricks, AAC blocks, and concrete blocks compare in the Indian context, you can refer to our comprehensive guide on Brick vs AAC vs Concrete Blocks.
Timeline of Events
- 2019 – 2024: Affordable housing sales share drops from 38% to 18% due to rising costs.
- December 2024: Proposal to levy 18% GST on FSI surfaces; industry objects citing price hikes.
- September 3, 2025: GST Council approves "GST 2.0" rationalization, abolishing the 28% slab for cement.
- September 22, 2025: New rates projected to become effective. Cement drops to 18%, stones to 5%.
- Late 2025 (Current): Dispute continues regarding the implementation of the FSI tax.
Expert Perspectives
Industry leaders have reacted with a mix of relief and caution. Anuj Puri, Chairman of ANAROCK Group, noted the direct link between taxes and supply: "Reduced GST on construction materials like cement can reduce construction costs by as much as 3–5%. Developers, especially those engaged in creating affordable housing, will get major relief in terms of cash flows and margins." Source
However, regarding the FSI issue, CREDAI has been firm. In a representation to the Finance Ministry, the body warned that the proposal to impose GST on FSI charges "could prove to be counterproductive" to the goal of Housing for All.
Niranjan Hiranandani, Chairman of NAREDCO National, emphasized the broader economic view, stating that the rationalization will "accelerate infrastructure projects, creating a multiplier effect on GDP growth."
Background: The Input Tax Credit Issue
To understand why costs are high, one must look at the 2019 tax changes. Since 2019, developers pay a lower GST on selling apartments (1% for affordable, 5% for others) but are denied Input Tax Credit (ITC).
This means developers pay taxes on cement and steel but cannot claim a refund for them. These taxes become a "sunk cost" that is passed on to the buyer. By reducing the tax on cement from 28% to 18%, the government has reduced the size of this sunk cost, effectively lowering the price floor for new homes.
What's Next?
As the industry moves into the festive season of late 2025, two scenarios are likely to emerge:
- Immediate Term: Expect a flurry of marketing campaigns from developers highlighting "passed-on benefits" to attract buyers during Navratri and Diwali. Cement prices should stabilize at the lower rate within weeks.
- Long Term: The industry awaits a final verdict on the FSI tax. If the government exempts FSI from GST, 2026 could see a boom in new project launches. If the tax is enforced, prices in Mumbai, Bangalore, and Chennai may rise despite cheaper materials, while Tier-2 cities will likely remain the beneficiaries of the current rate cuts.
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