Why GST Council recommendations may not bring cheer to real estate sector | Business Standard News

What are the key recommendations?

Following changes were recommended with effect from April 1, 2019:

(i) GST at 1 per cent, without benefit of input tax credit (ITC), on under-construction residential properties/ready-to-move residential properties where completion certificate is pending which qualify as “affordable housing” properties and at 5 per cent for other properties.

(ii) A new definition of “affordable housing” introduced, with, inter alia, a value cap of Rs 5 lakh.

(iii) GST on the input side for the acquisition of various rights by builders like transfer of development rights (TDR), joint development agreements (JDA), long-term lease premium, FSI shall be exempted for such residential properties

As a corollary, the existing effective rate of 12 per cent GST (with ITC) should continue for commercial properties.

What is the impact on builders with respect to existing stock?

Today, builders avail input GST credit of myriad things like steel, cement, bricks, electrical items, flooring and tiles and construction services — input credit benefit for all such items would already have been factored by the builders for pricing the current stock of under-construction properties. If builders have to take that entire input GST credit now as a cost and not increase the price of such properties (which they are unlikely to be able to do now, in light of the consumer expectations, given all the press coverage of the above recommendations), there may be a significant hit on their already slender margins.

While the impact of such credit restriction on margins will be relatively lesser in cities like Mumbai and the prime areas of Delhi and Gurugram, where land cost on an average is 50 per cent or more of the overall project cost (as per a recent news article in Business Standard), developers in southern Indian cities or Pune might be in for some headwinds.

Builders may also suffer if there is a spate of cancellations of old bookings by those hoping to get a better deal on account of these changes from April 1.

Will this have any impact on property prices?

In this regard, it is instructive to refer to Sudhir VS’ article on February 26, 2019, in Taxsutra. Sudhir has comprehensively demonstrated that for under-construction properties not quali­fying as ‘affordable’ and thus liable to 5 per cent GST without ITC from April 1, there will, in fact, be a price increase for properties priced up to Rs 5000/square feet. As per Sudhir: “….the benefit of the proposed GST of 5% restricting the input tax credit would be be­ne­ficial only to those projects which have a high rate per square feet on account of increased land price and has negative impact or no impact where the flat price is less on account of reduced land price.”

However, when one applies the numerical assumptions from Sudhir’s article for properties qualifying as ‘affordable housing’ and thus eligible for 1 per cent GST rate, there can be an effective price reduction across the spectrum of per square feet rates.

As per a report from the portal Livemint, currently, there are 588,000 unsold under-construction properties in the biggest seven cities in India of which about 35 per cent (around 200,000 properties) will qualify as ‘affordable housing’ under the new definition. Clearly, benefits of price reduction, if any, will be most prominent for these 35 per cent properties qualifying as ‘affordable housing’.

What are some of the key unanswered questions at this stage?

(i) Will there be transition provisions for the GST credit already vested in builders or the whole thing will be a write-off/cost? Without transition provisions, this would lead to a fresh spate of writ petitions by affected builders.

(ii) How will these recommendations apply with respect to mixed-use projects with both affordable and mid-segment houses or residential plus commercial?

(iii) Will there still be an option to avail ITC and pay GST at the old rate of 12 per cent, especially for projects which have commenced before April 1, 2019?

(iv) The cap of Rs 45 lakh: Does it apply to the basic value of the flat or includes charges for all amenities (including common parking in mixed projects) too?

What more could be done to boost to the real estate sector?

Building consensus among states for bringing real estate completely within the ambit of GST. That, coupled with strong enforcement, may lead to the game-changing tax reform that the real estate sector in India really needs.

via Why GST Council recommendations may not bring cheer to real estate sector | Business Standard News

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