It has been four years since GST was introduced in the real estate sector; the Government's move provided relief from multiple taxes. Another relief was when GST on affordable housing was brought down from 8 per cent to 1 per cent and from 12% to 5 per cent for other construction properties that do not fall in the definition of affordable housing. The new rates, however, meant that developers could no longer enjoy input tax credit. On the fourth anniversary of GST, realtors feel that the Government should think of some temporary waiver in GST to boost the market, especially the under-construction segment.
The bone of contention has been the GST on under-construction homes as there is no GST on ready-to-move-in homes and input tax credit (ITC). Under-construction homes attract 5% GST for premium (mid-range) properties. This does not, however, include ITC benefits, which would have decreased the total purchase cost. Over and above, 5-7% stamp duty and registration charges apply to both under-construction and ready-to-move homes, but the cumulative extra cost on under-construction homes effectively negates most of the price advantage they used to offer.
"Not surprisingly, most demand today is in ready-to-move properties which do not attract any GST. Developers, on the other hand, require working capital to execute ongoing projects. Due to a lack of buyer interest in under-construction homes, developers would be unable to access one of the formerly "conventional" funding options: interest-free capital raised directly from the market," according to Ashok Gupta, CMD, Ajnara India Ltd. This dynamic feeds the vicious cycle: buyers are hesitant to invest in under-construction homes, projects are delayed due to a lack of funding, and building progress is poor or non-existent, further dampening buyer confidence.
What needs to be done?
The situation is tricky for almost 19 lakh units across the top 7 cities; these include stalled, delayed, and ongoing under-construction units. MMR and NCR together comprise a whopping 60% share of the total under-construction units across the top 7 cities. It has been noticed in previous years also that buyer always grab the opportunities that help them save some extra money. "The reduction in GST rates is anticipated to activate that thinking, assisting the market in overcoming its current difficulties. The impact will be felt in non-metro markets where discretionary income is low, and homeowners in these areas will be able to invest in newer homes thanks to the rate drop," says Harvinder Singh Sikka, MD, Sikka Group.
Realtors are calling for a temporary GST waiver. "This, coupled with existing offers and discounts by developers, can make the home purchase a more attractive proposition. At present, the GST rate for premium residential properties is 5% of the total property cost, excluding input tax credit (ITC). For affordable homes (
The builders see a drop in profits that might be transferred to the buyers leading to an increase in property prices and defeating the purpose of providing 'Housing for All'. "The Government will have to pay attention to the Input Tax Credit as well; otherwise, it will be a direct hit on Affordable Housing as the house becomes even more expensive and will be away from common man's reach. Apart from this, Government should reduce the GST to a single digit on building material like steel, cement etc, as well as contractor service, among others," says Dhiraj Bora, Head Marketing & Communication, Paramount Group.