Reduction in rates brings cheer to real estate sector, but unsettles the GST regime
On Sunday, the Goods and Services Tax Council recommended a dramatic reduction in the headline indirect tax rates payable on under-construction properties. The GST rate payable on affordable homes, with effect from April 2019, will come down from 8% to 1%, and all other residential properties outside the affordable segment will attract 5% GST instead of the 12% levied at present. The new rate on affordable homes, defined as units that cost less than ₹45 lakh and have a carpet area of 60 square metres in metro cities and 90 square metres in non-metros, is far lower than the 3% rate mooted by a ministerial panel. The Council needs to meet again in March to clear the transition rules for the proposed rate cuts, and the conditions to be stipulated for housing projects to be eligible for the new rates. Days ahead of the expected announcement of the Lok Sabha poll dates by the Election Commission, the government is clearly keen on reaching out to different sections of voters. It has argued that the move will help meet the aspirations of millions of home-buyers, and revive the fortunes of real estate developers. Among the country’s largest employers in recent years, the realty sector has been marred by the debt overdose that has plagued much of corporate India; this has been compounded by high unsold inventory that hit cash flows. Properties that were already complete at the time of the GST’s adoption were spared the tax. But the introduction of 12% and 8% GST for under-construction premier housing units and affordable homes, respectively, had come as a dampener for fresh bookings.
Finance Minister Arun Jaitley reckons that revenues will not be hit by the rate cut. The implicit assumption is that higher sales volumes will compensate the exchequer. Experts expect a 4-5% reduction in home prices, but the decision to deny input tax credits to builders could bring a twist in the tale. Developers may be forced to raise base prices as critical inputs, particularly cement (taxed at 28%), entail high levies that can no longer be offset. Buyers may still prefer to opt for unsold completed properties that don’t attract GST, instead of incomplete projects. Compliance as well as material costs could go up too, as the Council is likely to mandate that around 80% of a project’s inputs must come from formal sector vendors in the GST net. It is difficult to determine to what extent a proposed tax exemption on development rights will offset these costs for developers. Whatever the outcome of this pre-election ploy, the frequent structural tinkering ahead of electoral battles has emerged as the biggest challenge to the stabilisation of India’s fledgling GST regime.
via Pre-poll gambit: on reduction of GST on under-construction properties – The Hindu