Gaining Some Transparency
A decision on reducing the GST rate on real estate hopefully will be announced this month.
by Yash Pandya
There’s a satirical anecdote where one poor person asks another the secret of staying warm on cold winter nights. The reply: "Just think about all the thick woolen clothes that well-meaning socialites will be donating during summer!"
The Goods and Services Tax (GST) has a similar relationship with real-estate development in India and, therefore, indirectly, the demand for vertical transportation. The third regulation to impact real estate in a trio of reforms — after currency demonetization and the Real Estate (Regulation and Development) Act (RERA) — the GST segregated new construction projects into two categories almost overnight.
One could either buy into a project or phase of it that was “completed” and be spared of paying GST, or book in an under-construction project and try to figure out the way forward. Houses coming under the Credit-Linked Subsidy Scheme (CLSS) meant lower GST, while figuring out how the benefit of input tax credit (ITC) should be passed on to the buyer required a mathematical genius, so the launch and pace of new projects slowed down considerably.
The GST Council had been urged to reduce the GST on real estate, and there were great expectations that a meeting held on January 10 would have some good news in store. However, the decision was put off, and a seven-member ministerial panel was formed to decide the same. Its decision is expected in the next meeting. Hopefully, it takes ground realities into consideration.
The question being asked is whether the GST rate on under-construction residential real estate will be lowered and, if so, by how much? Moreover, would the reduction be with or without ITC? A reduction in the GST rate should have a direct correlation on property prices, and house-hunters would obviously rejoice. However, many analysts have pointed out that the ITC credit plays a crucial role, as well.
As Abhishek A. Rastogi, Partner, Khaitan & Co., explained:
"For affordable housing projects, the rates should come down to 5% instead of the existing 8% with credits, and normal housing projects will be comfortable paying tax at 8% with credits. ITC available to these sectors for each project comes to approximately 60%, whereby they can easily pay 5% by credit and the remaining 3% by cash without facing any liquidity issue. But the existing rate of 12% for normal housing projects is a bit too stiff at the moment and needs to be revised urgently to revive this sector."
February 2019 begins with the interim budget being announced; hopefully, that, too, would have some positive news for the real-estate and vertical-transportation sectors, which, coupled with the anticipated reduction in GST, should provide a much-needed impetus to both.
Is the Glass Half Empty or Half Full?
The GST Council’s final decision on reducing the rate on real estate has evoked mixed reactions
They say every cloud has a silver lining. For the Indian real estate industry and, consequently, vertical transportation, the GST Council’s much-delayed pronouncement on the requested rate reduction is one such example. On one hand, there are loud cheers at the benefits expected from a certain section of developers.
According to T Chitty Babu, chairman and CEO of Akshaya Pvt Ltd.,:
“The revision in GST rates is certainly going to bring much-needed relief to homebuyers. For real estate developers, compliance will become more transparent and simpler. We welcome the government’s decision to revise the GST rates for affordable housing segment to 1%. The change in definition of affordable housing is certainly going to improve the buyer sentiments. Also, the much-awaited change in GST rates of under-construction properties to 5% is a going to be a game-changing decision for homebuyers and will boost the housing sales in this segment and attract a slew of investments in the sector.”
Homebuyers will be able to save a lot on their home investments depending on the value of the homes, due to the revision in GST, said Babu. He continued:
“We can witness a tremendous turnaround in the coming quarters, as the homebuyers who were holding off on their purchase decisions will now be able to take advantage of both the recent repo rate cut and the revised GST structure, allowing them to make their homebuying decisions with confidence. With RERA in place, too, the real estate sector is heading towards an upswing in the near future.”
While some saw a silver lining, some only saw the cloud. There was despair among some developers taking into account the wider repercussions when it comes to under-construction projects and new launches. While the complicated task of figuring out how the benefit of input tax credit (ITC) should be passed on to the buyer has been eliminated, there are other implications to be considered, as well.
Parveen Jain, NAREDCO vice chairman and CMD, Tulip Infratech, explained:
“Slashing GST rate from 12% to 5% on housing under construction but withdrawal of benefit of ITC (input tax credit) has the apprehension that the same may become the part of the cost, culminating in the rise of sale prices and may hinder the sale of under-construction housing. Now homebuyers may prefer only ready-to-move-in homes, as GST is not levied upon them.”
Ramesh Sanghvi, CMD, Sanghvi Parrsssva Group of Companies, identified a more immediate problem: the implementation date for the new rates. He explained:
“The realty sector is set to take yet another hit in the coming month. The announcement would dissuade people from entering into the market in March, since new rates would be introduced from April 1. GST rates on affordable housing have also been reduced from 8% to 1%. Why would anyone want to buy anything in March after these rates are declared a month in advance? The only hope is after the Lok Sabha elections."
While the February 2019 interim budget and RBI monetary policy announcements had influenced market sentiments to some extent, the reduction in GST rates for real estate was expected to be a key growth driver for high rises, and the elevators that are an integral part of them, as well. However, it seems to have changed gears and swerved in the “wait and watch” direction for a short while.