The Impact of New GST Structure on Real Estate

After reducing tax rates for the housing sector last month, the Goods and Services Tax Council recently announced another positive news for the industry. The long-pending demand of developers to end the input tax credit (ITC) was finally addressed.

So, what has changed? Well, the developers now have two options for their ongoing projects, where construction has started before April 1, 2019. They can either go ahead with the old tax rate of 12% with the credit or with a new 5% rate without credit.

For affordable projects, the new rate is 8% with credit and 1% without credit. For affordable housing, the cap on the price of the property is Rs 45 Lakh for both metro and non-metro cities. However, the project will have to meet the carpet area requirements of 60 sq. mt. in metros and 90 sq. mt. in non-metros to be eligible for the 1% rate.

The new rates will be applicable from April 1, 2019.

“This will allow the developers to opt between two GST schemes available to avoid operational hassles. Developers who choose the new GST rates will have to reverse their input credit proportionately. The GST Council has also mentioned that real estate developers will need to purchase 80% of goods and services from GST-registered vendors even without input tax credit benefit,” explains Niranjan Hiranandani, National President of NAREDCO.

Celebrating the decision, Madhusudhan G, Chairman and MD of Sumadhura Group says, “It is a big relief for developers as it solves the transition issues on ITC for the ongoing projects.”

Reiterating the same, Ravindra Sudhalkar, CEO, Reliance Home Finance says, “The GST Council’s decision will give developers a sigh of relief, albeit temporarily. Many developers were anxious following the government’s decision to bring in new GST rates minus ITC as they were concerned over the input stock which they have accumulated much before as part of their long-term purchases. The transition phase offered by the government would be useful for them.”

The government’s decision to lower GST rates was taken keeping in mind the fact that benefits of ITC were not being passed on to consumers by the real estate developers.

Homebuyers will now directly benefit from the new GST rates. Further, it will also reduce the pricing disparity between under-construction and completed projects. “A reduction in price will dispel hesitation associated with under-construction properties. This will incentivise sales of under-construction properties and spur demand for new projects,” explains Rakesh Reddy, Director, Aparna Constructions.

Well, not really. Developers might not be able to hike property prices in the immediate future. “Developers can ill afford to test the currently fragile market sentiment by raising rates immediately,” says Anuj Puri, Chairman of ANAROCK Property Consultants.

Overall, the transition plan for the implementation of the new tax structure is appreciated as it will give adequate time to adapt operations to the new structure.

The sales volume is also expected to witness improved traction, thereby reducing the unsold inventory. Lastly, the move will boost demand for under-construction properties and in turn revitalise the sector.