The GST council in their 33rd meeting held on 24th February 2019 reduced the GST rate for under-construction residential properties. The GST rates are brought down to 5% for the normal category from the earlier 12% rate. Further, the rate for the affordable housing category is bought down to 1% from 8%. In both of the following cuts, the builders won’t be able to claim the Input Tax Credit (ITC) like on steel, cement, paint and sand. The new GST rates will be applicable from April 1, 2019.
Furthermore, the GST council has adopted a new definition of affordable housing, the residential house in non-metro cities with a carpet is of up to 90 square meters (previously 60 square meters). Residential houses in the metro cities with a carpet area of up to 60 square meters (earlier it was 30 square meters) and with a value of Rs. 45 lakhs will be qualified under the affordable housing projects with an effective GST rate of 1%.
GST Levied (History):
A single tax- structure system was made i.e. Goods and Service Tax (GST) for the under-construction property at 18% rate on two third of its actual value with full Input Cost-Benefit (ITC). This brings the GST at an effective rate of 12% on the total value. Properties that are completely built along with Occupancy Certificate were excluded from GST.
Similarly, the GST rate on affordable housing was at 12% on two-thirds of its value, which brings effective GST of 8% on total value with full ITC claim. The remaining one-third is considered as the cost of land and hence not considered under the GST regime.
Later GST rates for affordable houses came down to 12% from 18% i.e. an effective rate of 8%.
Apart from GST charges the home buyer has to pay Stamp duty and Registration charges on the property.
The resolution plan of the government will provide breathing room for the realty sector. Further, this rate cut can help bring down the unsold houses afflicting in the real estate sector since many quarters. There are approximately 5.88 lakhs under-construction properties that are unsold in the top metro cities. With the rate cuts passed on to the customers can bring improvement in the sales of the builders and also improve the cash flow in the sector.
Properties that received construction certificate need not pay GST. Further, this resolution plan is also in line with the vision of the Government of ‘Housing for all by 2022’. Also, GST exemption can be availed on Transferable Development Rights (TDR), FSI and Long term lease premium for these residential properties where GST is payable.
The new GST rate cut comes with a condition that the majority of inputs and capital goods has to be purchased from the GST registered members i.e. who are ready to pay GST. This will help the government to keep tabs on the cash transaction and black money transaction in the realty business.
The withdrawal of ITC will impact on margins of the builders as the construction cost will increase and the prices will continue to remain under pressure. The developers will have to increase the base price which will, in turn, reduce the customer gains.
Continues liquidity crunch and limitation in borrowing money due to the increase in the defaults can still haunt the earnings. Moreover, the builders and developers are yet to pay approx Rs. 1.29 lakh crores as outstanding debt. But the companies generate less than half of the amount of income that can be utilized as repayment to these debts.
Input Tax Credit (ITC):
ITC generally determines the actual tax implied to the buyers. Also, ITC helps the builders reduce GST implied on Input or raw material from the amount of GST they have to pay on the output.
The developers previously have passed on 2%-3% benefit by the way of price reductions. But after the council barred the ITC claim the developers will have to recalibrate the project pricing of their under construction sites.
Draft of guidelines:
The GST Council will prepare rules and regulations and the transition will be drafted by the Fitment and law committee by March 10, 2019.
Effect of the rate cuts:
The socks in the realty sector closed in red, dropping off their morning gains, With Nifty realty index closed down by 0.7%, diminishing the gains in the second half in intra-day. Weighed down by stocks like Dlf closed at Rs. 168.05 down by 0.71%. Oberoi Realty fell by 3.17% closed at Rs. 487.15. India Bulls Real Estate declined by 1.34% closed at Rs. 73.85.
Contradicting to the expectations of the developers the new amendments is not beneficial for them. ITC being retracted will eventually hurt their profit margins. On the other hand, The GST rates being slashed the customers stand to buy a house at lower rates. The new GST rates are a means to transfer the profit from the developers to the customer’ pockets.