Budget 2021: Real estate sector wants critical construction material for affordable housing be taxed at lower GST

Like every year, the industry looks forward to the Union Budget with the hope to receive due attention of the finance ministry to the problems being faced by the industry and proposed solutions in the budget. However, much has changed since the Coronavirus pandemic hit the world in early 2020. The adverse effects of the pandemic have been felt worldwide and the negative impact on government revenues and the real estate sector is no different.

As per the finance ministry estimate, there is an anticipated shortfall of Rs 2.35 lakh crores in the GST collection during the FY 20-21 and states have agreed to borrow almost Rs 1.1 lakh crore to meet the revenue deficit. The continuation of GST Compensation Cess beyond the original tenure of five years to address the revenue shortfall is also a cause of concern for the taxpayers.

In this backdrop, the primary focus of the government will be on improving the healthcare system, enhancing public spending on social infrastructure and providing impetus to bring the growth momentum back in the economy. With higher anticipated spending and dropping revenue collection, the finance ministry has to do a balancing task to bring the economy back on the growth pedestal.

Amidst these uncertainties, the real estate industry expects the government acknowledges some of the following challenges faced by it and provides suitable relief in the Budget 2021:

The focus of the government is to provide affordable housing to all in urban areas by 2022. Therefore, the sale of under-construction affordable property is taxed at 1 percent. However, key construction materials attract higher GST rates such as cement (28 percent), steel (18 percent), tiles (18-28 percent), etc.

This leads to an increased cost of construction thereby, limiting the affordability quotient of the consumer. Therefore, it is expected that these critical construction materials be taxed at a lower GST rate, especially for affordable housing to meet the intended objective of housing for all.

2 The definition of affordable housing has two components ie the value limit [Rs 45 lakh] and the area limit [60/90 sq. meters for metro and non-metro cities respectively].

As there is a common value limit prescribed for both metro and non-metro, most of the consumers residing in metros are deprived of such benefits offered by the government. Therefore, to ensure that the benefit of the reduced rate of tax applies to all consumers in India, whether residing in metro or otherwise, the value limit for the metro cities, especially the Mumbai Metropolitan Region, should be enhanced in line with the current ready reckoner rates.

Transfer of development rights is liable to GST as a service at the rate of 18 percent. However, the sale of land and building is outside the purview of GST. The grant of development rights coupled with conveyance in land in favour of residents is akin to the sale of land. The GST payable on such development rights increases the cost of construction without any input tax credit.

Hence, there is an immediate need to construe such transfer of development rights akin to definition under the transfer of properties act (which includes rights attached to land) and not be subjected to GST. This would reduce the effective burden of tax on the buyer.

As per Section 54, the taxpayer is allowed to claim a refund on accumulated Input Tax Credit on account of inverted duty structure. However, real estate developers are restricted from claiming such refund, leading to increased tax cost and discrimination in taxation policy. Making the said refund available to the real estate sector would help developers in offering reduced prices to the end-consumer.

Another concern in the real estate industry from a consumer standpoint is the levy of GST on the common area maintenance charges recovered by the housing societies. The housing society functions on the co-operative principles and values of democracy, equity, equality and solidarity. Therefore, there is no service by the society to its members and also there is no consideration.

Hence, the government should exclude the maintenance charges collected by the housing society from the purview of GST. This will provide much-needed relief to the flat owners and will reduce their burden in the current pandemic scenario and will be a welcome step.

The recent reduction in the stamp duty rate by the Maharashtra government had a positive impact on enhancing the sale of residential units across high-end/luxury, mid-market and affordable segments. Similar relief/sops by the Centre can revive the economic cycle for real estate and other ancillary/support industries.

The industry is hoping that the finance ministry will address these concerns in the Budget 2021 and pave the way for sustainable growth of the sector and for the benefit of all the stakeholders including the consumer.