India: GST Rate Cut: Government's Aid To The Struggling Real Estate Sector

Last Updated: 6 March 2019
Article by Shreyash Taparia and Ashay Shah

Providing massive relief to home buyers, the 33rd GST Council meeting on Sunday, 24th February, 2019, lowered the GST rate on under-construction houses to 5% (five percent) from the earlier 12% (twelve percent). For affordable housing, the earlier tax rate was 8% (eight percent) which is now reduced to 1% (one percent). These rates will come into force from 1st April, 2019, if brought into force by a notification in the Official Gazette.

Definition of 'Affordable Housing'

The definition of 'affordable housing' under the GST law has also undergone a change. The earlier definition read as under:

""Affordable Housing" is defined as a housing project using at least 50% of the Floor Area Ratio (FAR)/Floor Space Index (FSI) for dwelling units with carpet area1 of not more than 60 square meters."

The new definition however, has a two-fold requirement to classify housing as 'affordable'. Affordable housing in metro cities, namely Delhi NCR region, Mumbai MMR region, Kolkata, Chennai, Hyderabad, and Bengaluru, will include properties with a carpet area up to 60 (sixty) square meters and cost up to Rs.45,00,000/- (Rupees forty-five lakh). For non-metro cities, properties with a carpet area of 90 (ninety) square meters and cost up to Rs.45,00,000/- (Rupees forty-five lakh) will fall under the affordable housing segment.

Withdrawal of Input Tax Credit

The earlier benefit of input tax credit will now be withdrawn after the coming into force of the revised GST rates as it was felt that the developers failed to pass on the benefits of the input tax credit to the home buyers. Thus, by reducing the GST rate, the home buyers will be directly benefited in turn making the tax applicability and real estate transactions more transparent.

For those developers that passed the benefit of input tax credit to the home buyers, its withdrawal may lead to increased pricing of properties. The withdrawal of the input tax credit may, for a few months adversely affect the prices of houses as the developers may seek to recover the loss suffered by them due to withdrawal of input tax credit by increasing the prices. However, the problem of unutilized tax credit which was a cost for the developer on completion of the project is now dealt with as the same is withdrawn. This should lead to better pricing of properties in the coming months.

GST exemption on TDR, JDA, Lease (premium) and FSI

The 33rd GST council meeting has also decided that an intermediate tax on Transferable Development Rights (TDR), Joint Development Agreements (JDAs), long-term lease (premium) and Floor Space Index (FSI) shall be exempt only for such residential properties on which GST is applicable. This should facilitate better cash flows in such transactions.

On-going Projects

With regard to those properties where construction work has already begun, transition rules and guidelines will be drafted by the tax authorities to provide clarity on applicability of GST on such projects/properties.

Conclusion

The Government has brought about the change in the GST rates in order to boost demand for real estate due to the recent slow-down in the sector. This move should not only drive sales but also promote developers to undertake affordable housing projects. All in all, these changes seek to make the tax structure more transparent, the tax compliance easier and less cumbersome for developers. We can anticipate a rise in the real estate prices till April 2019 due to the withdrawal of input tax credit. However, the prices may start to see a decreasing trend after the revised GST rates are implemented. Though the elimination of input tax credit benefit may temporarily hit profitability of the developers, higher demand is anticipated over the coming months as a result of this move resulting in greater sale and increase in revenues for the developers. This makes it a win-win situation for both, the developers and the home buyers.

Footnote

1. "carpet area" shall have the same meaning as assigned to it in clause (k) of section 2 of the Real Estate (Regulation and Development) Act, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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