The high rate of Goods and Services Tax (GST) on under-construction properties (which was reduced recently) led to the fund crunch in the housing sector and also among non-banking finance companies (NBFCs), according to Indira Rajaraman, economist and a former member of the Reserve Bank of India’s board.
“In the earlier funding model (prior to GST regime), for construction of houses, housing companies obtained working capital through sale of apartments before the construction even began.
“This had the property of getting consumer commitment [even] before the start of the projects,” she said, delivering the sixth Raja J. Chelliah Memorial Lecture on the topic ‘The Evolving GST’.
‘Distortionary content’
Dr. Rajaraman was pointing out to the construction sector being one of the examples of distortionary content under the GST.
She pointed out that for under-construction property, the GST was 18% and with one-third abatement of value of land, the effective rate was 12%. “Clearly, the taxation of pre-construction purchase at 18% with simultaneous exemption of completed housing implied the intent to shatter that financing model, perhaps to squeeze out the use of untaxed cash (black money) in the construction sector,” Dr. Rajaraman said.
Post-GST, the construction sector turned for funding to NBFCs which had already received investible funds after demonetisation flooded banks with cash in November 2016. This was followed subsequently by financing from mutual funds, she added.
“The impact of this avenue of funding replacement in conjunction with uneven diligence by NBFCs and credit rating failure were among the many factors leading to the serial defaults by Infrastructure Leasing and Finance Company (IL&FS) in September 2018 and the contagion impact on NBFCs thereafter. There is also presently a huge build-up of unsold inventories of housing units,” Dr. Rajaraman said.
The GST Council does not seem to have thought through the implication of shattering that business finance model of the sector (housing), which played a key role both in terms of job creation and fulfilling the housing needs, she added.
Dr. Rajaraman also said she flagged this issue to RBI Governor Shaktikanta Das during a meeting in Delhi.
Now, the rates on under-construction properties had been reduced to 5% without credit for taxes and to 1% for affordable under-construction properties, recently, she said.
“The move should help in gradual pick up of housing demand and improve the health of housing sector and NBFCS,” Dr. Rajaraman said.
