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Explainer: GST rate cut to boost sales of housing units, reduce unsold inventory

Homebuyers ought to be wary of developers who may try and increase the base price for non-affordable housing units to make good the loss on account of input tax credit being denied to them

Representative image

Representative image

In an attempt to revive housing sales and address complaints received from homebuyers that some developers were not passing on the benefit of input tax credit, the Goods and Services Tax (GST) Council on February 24 slashed tax rate on under-construction residential properties, making the effective tax rate 5 percent for the normal category and 1 percent for the affordable housing category.

In both cases, no input tax credit (ITC) can be claimed by developers.

The new rate will be applicable from April 1, 2019.

One of the biggest benefit that will accrue to homebuyers is the fact that they would now have to pay an upfront GST at the rate of 1 per cent for affordable houses and 5 per cent for non-affordable houses without worrying about getting back the input tax credit from the developer. The billing systems are expected to become more transparent.

It must be remembered that the Finance Ministry had been receiving complaints from homebuyers that real estate developers were not passing on the GST rate cut benefits to home buyers. The government’s note in December 2018 was an outcome of anti-profiteering complaints against some builders, after it was brought to its notice that some builders/contractors are not passing on the benefit of lower tax burden to homebuyers.


The Council on Sunday also decided to change of definition of affordable segment to 60 sq m for metro areas and 90 sq m for non-metro as well as a price definition at Rs 45 lakh for affordable housing. This will bring more residential apartments across cities– LIG and MIG - under the ambit of affordable housing.

These decisions are expected to boost demand for under construction properties, which had been massively hit after July 1, 2017 – the day GST was implemented because ready-to-move-in properties with a completion certificate were exempt from GST.

The GST Council’s decision to reduce the GST rate for affordable housing from 8 per cent to 1 per cent, which is an almost 7 percent reduction, will by and large benefit builders as this may lead to increase in sales. The potential demand generation will ‘far outweigh any negative aspects leading to greater sales numbers and revenues.’

But buyers going in for apartments in the non-affordable category (above Rs 45 lakh) need to be wary of the fact that some builders may try and increase the base price on the plea that they have incurred a loss on account of input tax credit being denied to them.

For the real estate developers, the move may see sales rise to an extent. The reduced rate, is expected to alleviate developers’ liquidity issues to some extent. Along with the other positives that the recent interim budget provided, it will create a more positive environment for all real estate stakeholders.

Decision to boost demand for under construction properties

The reduction in GST can potentially reduce the buyers' payout by 6-7 percent on the overall purchase, depending on the category. The increase in sales will bring down the unsold inventory that has been afflicting the real estate sector. The move is also in line with the government’s vision of ‘Housing for all by 2022’.

Currently, GST is levied at an effective rate of 12 percent (standard rate of 18 percent less a deduction of six percent as land value) on premium housing and effective rate of eight percent (concessional rate of 12 percent less a deduction of four percent as land value) on affordable housing on payments made for under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale. However, GST is not levied on buyers of real estate properties for which completion certificate has been issued at the time of sale.

What this means is that an affordable residential unit worth Rs 45 lakh would have been taxed at 8 per cent earlier, which meant an output tax of Rs 3.6 lakh. This will now be taxed at 1 per cent which means GST of only Rs 45,000. This is a drastic reduction.

“The elimination of input credit tax benefit may hit profitability for the supply side; however, the potential demand generation as a result of this move will far outweigh any negative aspects leading to greater sales numbers and revenues," said Shishir Baijal, Chairman & Managing Director, Knight Frank India.

The government is focused on their agenda of creating affordable homes, which is visible in the decision to reduce GST to a mere 1 percent in this category. Low outflows will push demand in the segment which, in turn, will keep developers committed to build more affordable homes. The potential reduction in payouts for purchase of a new home in key cities of India will further improve the affordability quotient in across all markets, he says.

“The reduction of GST on Affordable Housing to 1 per cent is a revolutionary step for Indian Real Estate. This move is a significant triumph for homebuyers and will play a huge hand in boosting sentiments,” says Jaxay Shah, National President CREDAI.

“The reduction in GST both for the general segment to 5 percent from 12 percent and the affordable category to 1 percent from 8 percent is a huge relief to the industry and is a widely welcome move which is likely to have a positive impact on the sales of under construction homes. Further, the change of definition of affordable segment to 60 sq m for metro areas and 90 sqm for non metro as well as a price definition at Rs 45 lakh is a huge positive step which is likely to give a boost to the affordable category,” says Anshul Jain, Country Head and Managing Director, Cushman & Wakefield India.

This will certainly cause sales of housing units within this segment to rise to a significant extent. Most players currently have considerable unsold stock within this segment, says Anuj Puri, Chairman – ANAROCK Property Consultants.

As per ANAROCK data there are as many as 5.88 lakh under-construction homes lying unsold in the top seven cities. Of these, 34 percent are priced below Rs 40 lakh alone. With affordable housing now being defined within Rs 45 lakh budget, more properties qualify for this ‘sweet spot category.

“The GST cut, coupled with this critical change in definition, will induce more sales in homes falling in this budget range – a win-win for both builders and buyers,” he says.

Cash-strapped builders have been hoping for all and any Government interventions which can help boost their sales volumes. This GST cut will provide such a boost, at least in the short-term as more fence-sitters who had been postponing their purchase decisions now have an additional incentive to take the plunge.

Will it lead to increase in property prices?

While the new date (April 1, 2019) will give some time to the industry to assess the impact and work out the new prices, experts believe that developers may increase the base price to recover the loss of input credit but would need to be cautious given the surge in anti-profiteering investigations for restaurants, in similar circumstances.

To cite an example, earlier for an apartment worth Rs 1 crore, a homebuyer had to pay GST at the rate of 12 per cent which meant that the value of the unit was Rs 1.12 crore. With the rates now reduced to 5 per cent, the same apartment would now cost Rs 1.05 crore.

But real estate experts and tax consultants fear that a developer may increase the base price to Rs 1.10 crore on the pretext that he had to incur a loss on account of the input tax credit having been denied to him.

“The important thing to watch out is whether the builders increase the base price to compensate them for loss of input tax credit. If yes, then to what extent.” said Harpreet Singh, Partner, Indirect Taxes at KPMG.

He also says that it is good that the new rates would be effective from 1 April 2019, this allows a window to the builders to do a lower rate vs. loss of input tax credit analysis, to compute the net impact.

End litigation on joint development agreement and development rights

Besides, GST exemption on Transferable Development Rights (TDR), long-term lease (premium), FSI will be exempted only for such residential property on which GST is payable, a move that is expected to solve the cash flow problem for the sector.

“Details of the scheme shall be worked out by an officers committee and shall be approved by the GST Council in a meeting to be called specifically for this purpose,” a government release said.

Overall, the decision of the GST Council is also expected to end litigations on joint development agreements and development rights issues.

“Earlier due to high rate of taxes, some developers and contractors  used to make aggressive tax projections and try and reduce the tax by structuring the contracts and agreements to pay lower tax. All this may come down now,” say legal experts.

In the last two years since, GST has been a major factor keeping homebuyers away from under construction apartments. Many developers were willing to absorb most of the GST impact on buyers in under-construction projects to boost sales, particularly in the low-ticket size apartments and in the affordable segment.

While the overall cost of construction seems had fallen under the GST regime on account of additional input tax credits for builders, the intent to pass on the benefit of lower cost of construction to the end-buyer appeared to have been missing in the market. Due to this the finance ministry had time and again asked real estate dealers to pass on GST rate cut benefits to home buyers but to no avail.
Vandana Ramnani

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