GST council Meet: Slashing of rates to 5% on under construction housing.


In a big relief to home buyers, to boost the real estate sector and making housing affordable to middle and neo-middle class. The finance minister at the GST council meeting held on 24th February 2019  slashed the tax rates chargeable to under construction housing property and ready to move in flats where a certificate of completion has not been issued to 5 percent from the existing rate of 12 percent. Though, the real impact of this change may not be as fruitful as it seems to be.

The council has also decided to cut the rates on affordable housing for those property costing 45 lakhs or less to 1 percent without Input tax credit from the existing 8 percent.

The Council has also expanded the ambit of definition of affordable housing in twin win. The affordable housing segment in metro cities namely Delhi NCR , Mumbai MMR, Kolkata, Chennai, Hyderabad and Bengaluru will include properties with a carpet area up to 60 sq meters and costing up to 45 lakhs. For non- mtero cities, properties with a carpet area up to 90 sq meters and costing up to 45 lakhs will be included as affordable housing.

The revised rates will be applicable w.e.f  1st April 2019. After the changes, developers will not be able to claim the input tax credit (ITC) for the real estate sector.

Let's discuss its impact on:

1. Developers 

Without the ITC of GST available to developers, the GST paid on inputs like steel, cement, tiles, hardware, marketing, brokerage etc. which was earlier being passed on to the end user will now simply become a part of their cost. Thus, these costs will now have to be borne by the developer and will eat away from his already wafer-thin margins.

The major impact will be seen on the ongoing project, where the developers have accounted for their cost as per the old rates considering the ITC available earlier. Now they would have to increase the cost of the project. since he would have sold a significant part of his inventory already, he would have no way of recovering these costs and would simply have to bear these huge losses

2. Buyers

As the cost for the developers will increase, they will in future have to pass on this cost to the customer by way of increase in prices.

This will deal a severe blow especially to affordable housing projects where the component of cost of construction is significant as to the total cost of these units. The combined effect of an increase in price (due to non-availability of Input Tax Credit) along with the flat GST of 1% charged to the customer will be at least equal to, if not more than 8%

Conclusion:

The change in tax rate may seem to be a positive implication at first look but its actual outcome shall prove to be negative. As it would increase the overall tax liability which ultimately increases the overall cost of the house. Even though it may seem like a move that may support the objective of ‘Housing for All by 2022’, a closer look suggests otherwise. Further, it would be a significant blow for the huge number of ongoing projects in the country, especially for affordable housing projects.

Overall, for the economy, it’s a regressive step that defeats the very purpose of GST and leads to a cascading effect of taxes. On one hand, we are talking of including stamp duty in GST so that its credit is available and on the other hand the Govt. is removing input tax credit on GST. This would also mean an increased usage of black money in real estate which was currently on the decline.

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