Updated: Apr 12, 2021
Effect of GST on Real Estate
The Goods and Services Tax Council of India on February 24, 2019, had slashed the rate on under-construction residential properties to 5% for the normal category and 1% for the affordable housing category from April 1, 2019. In both cases, no input tax credit can be claimed by the developers. However, most developers did not react positively to this announcement because they were worried about its impact on the input stock they had already bought before as a part of their long-term purchases. This resulted in most developers charging an incremental basic sale price from the buyers. This in turn neutralized the very basic purpose of reducing the GST to help reduce the cost of the property to the buyer as well as enhance the sales for the developers.
To address these apprehensions the GST Council has now permitted real estate developers to exercise a one-time option to choose between the old GST rates and the new GST one for their under-construction residential projects to help them resolve issues pertaining to the input tax credit. Real estate experts believe that this will provide flexibility to real estate developers to go for the best possible and most suitable tax option. So developers now get a one-time option to continue paying tax at the old rates on their on-going projects, that is for buildings where construction and actual booking both started before and which will not be completed by March 31, 2019. This will help address the apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits.
However, the choice between the two rates for ongoing real estate projects is not going to be an easy one with concerns over how the over-used credit will be calculated and adjusted in case the new rate is taken by the developer and what the customer reaction will be if the builder chooses to stay with the old rate and there is no reduction in the prices. This is a very smart move by the government as now the developer will choose an option which is most suitable and beneficial for him. This will ultimately benefit the home buyers as the developer cannot charge any incremental basic sale price from the buyers due to the flexibility offered to them for ongoing projects and bookings before April 1, 2019. This realistically practical move will enable the realtors to segregate under-construction projects from new projects and would provide relief to builders who were worried about the loss of input tax credit. This would also enable them to price the loss of input tax credits in the new projects.
Of course, the choice of selecting the GST regime would depend on the dynamics of the respective project. The ones with healthy sales traction are likely to continue with the earlier regime to maintain their profitability. On the other hand, the consumers will expect the developers to charge them lower GST rates in line with the new tax regime, which might affect the developer’s profit margins. However, for projects with slower sales, the developers may choose to change course as the stimulation of demand will far outweigh the adverse impact of ITC withdrawal on his margins. The GST council has also clarified that 15% commercial space within a residential project will be treated as residential property. This means projects with up to 15% commercial space such as office, shops etc. will be given the same tax treatment as residential property. This has been done to resolve issues faced in cases where buildings have commercial amenities such as clubs and restaurants as well as in the case of residential commercial projects. However to avail of the lower GST rate a pre-condition has been imposed that 80% procurement by developers should be from GST registered vendors.
The new tax rates of 1% and 5% shall be available only subject to the condition that the input tax credit shall not be available and that 80% of inputs and input services shall be purchased from GST registered vendors only. Any shortfall in purchases according to these norms would be levied a reverse tax of 18%. Tax on cement purchased from unregistered vendor shall attract a 28% duty. Making it mandatory for developers to purchase raw material from registered vendors is an attempt made by the government to organize one of the most unorganized sectors in the country. Experts believe that this has been done to ensure that more vendors will be forced to get registered in the future and instances of black money transactions may also come down with this.
The GST Council has also further clarified that all transfer on development rights, FSI and long term leases will not be liable to tax provided the 1% and 5% GST have been paid for as per the rules for the houses that have been constructed within the residential complex. Experts are sure that all these measures will have positive effects that will change the overall sentiments of the real estate market for the better.