T he recent changes in GST rates on under-construction property and affordable homes seems to provide a succour to home buyers just on the surface. It may in may ways with new rates trigger the return of black money and pressure the already beleaguered sector. Allowing developers to choose between old or new rates for new projects from April 1 also goes against the ‘one nation, one tax’ vision.
It rarely happens that the government’s move to create policies that benefit the consumers may end up changing things unexpectedly and trigger adverse outcomes.
In the current environment of endless changes to the GST, the tax evokes mixed feelings from different sections of society. In February 2019, the government reduced the GST for under-construction flats, including affordable homes.
Changes to GST
Before the reduction the effective GST levied on payments for under-construction property was 12%. This was also applicable to ready-to-move-in homes where completion certificate (CC) is not issued at the time of sale. The GST on affordable homes was 8%. On ready homes with completion or occupancy certificate, as the term may vary across States, the GST rate was 0.
Customers fancied the ready homes as they were apprehensive of the 12% tax they had to pay on a home that is under construction.
After the February cut, the GST on under-construction homes has been reduced to 5% while for affordable homes it is just 1%. However, at the same time the government has also removed input tax credit (ITC) which was available earlier when the rates were 12% and 8% respectively.
The GoI went on to say that this will facilitate more demand in the sector as prices come down though, for reasons beyond our comprehension, it looks like the move at present is acting otherwise.
The government’s main motivation in moving to reduce the GST rates on these housing segments was to appease customers who felt that developers were not passing on the benefits of ITC to them through reduced house prices. Hence, the 33rd meeting of the GST Council decided to simply lower GST and remove the complexities of ITC.
In the final assessment, however, it may seem that customer might actually be worse off due to the reduced GST rate which also works against the already beleaguered real estate sector.
Sample this
Let us look at an example where the construction cost of a house is ₹3,000 per sq. ft with an average tax rate of 15% which works out to ₹450. Let’s assume the sale price of this house to be ₹6,000 per sq. ft with 12% GST working out to ₹720.
Ordinarily, in the pre-GST reduction era, a developer would pass on the ₹270 (720-450) benefit of ITC to the customer with a final price of ₹6,270 as opposed to 6,720 without ITC.
Applying the current GST rates to the above prices the final price of the house works out to ₹6,300 at 5% with buyer having to shell out an additional ₹30 to account for the negative difference in taxes.
Negative impact
On the surface, doing away with input tax credit will marginally increase the cost for developers but it will also remove the disputes of ambiguity over passing on benefits to customers. In the bigger scheme of things, however, this reduction in the GST will only positively impact the prices of homes where the price of land is high, such as in the metros of Mumbai and Delhi. In smaller metros such as Pune and Bengaluru where price of land is much lower and construction costs are higher, the impact of this reduction will be negative. This adversely affects the low and middle income categories and the affordable housing sector.
Even though the overarching aim of this move is to reduce tax burden on buyers and bring in more transparency, there is also scope for the reverse to happen. The government plans to curb the return of black money to the construction sector by providing the condition that a very high percentage of goods (currently proposed at 80%) will have to be procured from GST-registered dealers. This, however, will once again increase compliance costs which is contrary to the stated aim of simplifying tax implementation.
Furthermore, input credit tax helped bring even the smaller players such as contractors and vendors into the formal system and within the tax net. Removal of ITC undoes this good and incentivises transactions in black money.
The definition of affordable housing has also created scope for creative accounting and the return of black money. For example 90 sq. m.homes priced up to ₹45 lakh in non-metros such as Pune come under affordable housing. In the case of homes costing upto ₹65 lakh, customers can pay ₹20 lakh in cash, make an agreement of ₹45 lakh, and take the benefit of 1% GST.
Transition to new GST rates
As of March 19, the GST Council has approved a transition plan wherein the new GST rates will be applicable from April 1 for all new projects. Developers will be given reasonable time in consultation with States to implement the new tax structure. For under-construction projects developers can choose either the old rates with ITC or new rates without ITC. This latter decision is contrary to the ‘one nation, one tax’ vision as developers can choose from multiple GST rates for under-construction projects.
Conclusion
There is a lack of clarity about why the government opted for this GST model rather than a revenue neutral stance which also retains the benefits of ITC. The biggest concern of the industry post this move was that effective costs went up and it was not perceived as a revenue neutral measure. Simultaneously, there is a section of industry that feels that cement may be brought to a lower tax slab and in general the GST rates may be lowered. However that isn’t something one can bet his money on.
(The author is Co-founder, PropStory.com, an online content platform that carries information and reviews about properties, connecting stakeholders in the real estate industry)
