GST on real estate maintains status quo

[ecis2016.org] After much anticipation, the GST Council has failed to deliver a final verdict on GST applicable on real estate. We examine whether a favourable verdict would have made any meaningful difference

Here’s a Utopian vision: the government would announce a Goods and Services Tax (GST) rate cut, home buyers would cheer up since prices would reduce marginally and the market revives. Really? The biggest paradox in Indian real estate is that numbers suggest a massive burden of unsold housing stock, in the midst of a chronic shortage of housing. As long as prices do not reduce significantly, the housing shortage will only widen, regardless of tax sops.

You are reading: GST on real estate maintains status quo

What we have today, is a nation of aspiring home buyers, many of whom are perpetually on the fence, waiting for a slew of minor policy windfalls, to cumulatively make a home purchase feasible and attractive. Most cities saw some sales growth in 2018 but the market cannot revive on consistently slow growth – it needs a decisive accelerator. Would a GST rate cut have been such an accelerator, or does the market need a lot more than that?

Certainly, GST on under-construction properties was a severe hurdle in 2018 and the possibility of a GST rate cut in late December, literally froze property buying decisions for many. Regardless of how much or how little such a rate cut will actually do to revive the market, all stakeholders – from industry players to buyers – hoped for it with bated breath. It bears remembering that the modest growth numbers in 2018, were significantly led by sales of ready-to-move properties – not only because they are exempt from GST but because incessant project delays have taught buyers to be wary of under-construction projects.

High GST rates continue to burden commercial realty

While the major focus of anticipation for a GST rate change was on the residential sector, commercial real estate cannot be ignored. As of now, GST on commercial real estate continues to be levied at 18 per cent on the overall rental value, without the builder getting any input credit benefits. In the absence of input tax credit (ITC), developers invariably pass on the additional construction cost to their tenant businesses, by way of increased rentals, over and above the charges that the latter pays as GST on the rental value.

This spikes up the overall rental cost for corporates leasing spaces across the country. Given that Indian commercial real estate kept the sector’s growth numbers ticking during the prolonged slump, it was largely anticipated that to boost its growth further, the government would have given ITC benefits, along with a possible rate cut. However, back to residential. Let us examine the actual savings that a possible GST rate cut would have implied, for those who decided on under-construction residential properties.

Flat rate of GST minus ITC benefits only some buyers

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Replacing the erstwhile service tax with GST, already caused considerable financial damage to serious buyers, as they were taxed at 12 per cent, as opposed to the more moderate twin taxes (service tax and VAT) earlier. Despite a provision for receiving ITC on GST, buyers never really had a clear understanding about how and when it would be credited. Although the government directed builders pass on the ITC benefit to buyers, especially in the case of affordable housing, the ambiguity around the intent and delivery of this benefit prevails to the present day. This clearly indicates that a decision favouring a flat GST rate without ITC to benefit buyers, makes a lot more sense.

ITC benefit: An example

When we talk of uncertainty of the ITC benefit, we are talking about uncertainty over an amount of Rs 1,80,000, on a product value of Rs 50,00,000 – approximately 3.6 per cent. This is a significant amount for most Indian home buyers. Unfortunately, buyers remain oblivious to the fact that they are eligible to this benefit, if builders passed it on to them.

Clearly, a flat five per cent rate of GST on under-construction homes, without the ITC, would provide an indubitable and transparent benefit to buyers. The only feasible scenarios are:

1.   A convincing and strongly-enforced clarifications on the ITC and
2.   Its total abolishment, in case of under-construction residential real estate.

Either of these two options would be added incentives to buy under-construction properties. The other alternative was to fix the GST rate with ITC at 12 per cent of the cost of the property (effectively lowering the GST to eight per cent, once the input cost is accounted for and reduced). Buyers would benefit from a lower tax but be no wiser about what exactly they are entitled to under the ITC and how they will get it.

Also read our in-dept analysis on how GST on real estate will impact home buyers and the industry

Lower GST to have an adverse effect on budget home buyers

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The popular assumption was that a flat GST rate cut would have boosted the entire residential sector. However, there was a high possibility that it could deliver a major setback to the affordable housing segment. In fact, lower GST rates minus ITC, could increase the prices of budget homes. Currently, affordable homes are taxed at eight per cent of the total cost, including the nebulous benefit of ITC.

A closer look at how costs could have varied post the new rate

Thus, prices under the new flat GST rate of five per cent, would have increased by Rs 180 per sq ft, for lower budget homes.

Demand versus sales

In 2018, there was a perceptible increase in site visits and buyers actively scouting for options at the best deal. Negotiations were getting increasingly interesting and meticulous, as the parties debated out the costs and discounts, to arrive at mutually acceptable figures. A final decision on the GST rate and clarity, or the abolition of the ITC, could have triggered demand but would it really have helped close transactions? Thus, we may need to look beyond minimal tax sops and consider whether they actually make homes affordable and catalyse sales. Perhaps, instead of constantly looking for tax sops, we need to question the very fundamental of pricing in real estate.

(The writer is chairman, ANAROCK Property Consultants)

Source: https://ecis2016.org/.
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Source: https://ecis2016.org
Category: Lifestyle