GST council cuts tax on under-construction houses to 5%, industry responds with caution

New Delhi, Feb 24 (IANS) In a big relief to the realty sector and homebuyers, the GST council on Sunday lowered tax on under-construction properties to 5 per cent from 12 per cent, and affordable housing projects to 1 per cent from 8 per cent. The council also made changes in the definition of the affordable housing.

The new rates will be applicable from April 1.

Finance Minister Arun Jaitley said: "It is a milestone decision to promote affordable housing for all. The expanded definition of affordable housing is to encourage aspiring people buy bigger flats. The council did not accept the super carpet area concept as many developers have made it variable and flexible.

"We will have to see how new rates can be passed on to incentivise people to buy under-construction flats. We believe competition will take care of price benefits to be passed on to consumers."

"However, developers won't be able to claim input tax credit (ITC)," Jaitley said. The group of minister (GoM) on housing had suggested 3 per cent affordable housing projects.

The council also decided that properties costing up to Rs 45 lakh will be considered affordable as well as properties with a carpet area of 90 square metres in metro cities and 60 square metres in non-metro cities, he said.

On issues like transfer of development rights, sale or transfer of floor space index (FSI) and joint development rights, Jaitley said it was suggested that these be exempted from the goods and services tax (GST) for the sector's growth.

The council, he said wanted guidelines for the transition to be prepared for the law & fitment committee to take it up on March 10.

"Transition is a challenge. The notification will have to be carefully drafted. The law & fitment committee will draft notifications and the GST council will approve the same through video-conferencing," he said.

Revenue Secretary Ajay Bhushan Pandey said the decision will help the common man afford a house, while also enabling the industry to emerge from the "recent tough time".

Though praising the decision, the housing sector and property experts, also called for caution.

Niranjan Hiranandani, National President, NAREDCO, said, "Industry lauds the GST rate cut on real estate to 5 per cent on non-affordable and 1 per cent on affordable housing without input tax credit as a welcome and positive move. It will bring a big relief to the homebuyers and help narrow the demand mismatch gap."

The announcement would give an impetus to affordable housing and enthuse homebuyers to close the sale deals. "The GST on cement has not been reduced as was expected. At 28 per cent, it remains among the highest taxed inputs for construction -- and there will be no input tax credit, developers will face a challenging time," he said.

He said the changes should have been applicable 'with immediate effect'. As it would be effective from April 1, "we will see rise in sales figures only in the next financial year," he added.

Rajat Mohan, Partner, AMRG & Associates, said lowering of tax rates at the cost of the tax credit in the realty sector could be a good populist measure. But businesses may witness a quick bloodbath, and after that the sector will reboot itself to a higher equilibrium price to justify the margins, he added.

"This may prove to a costly affair for businesses as they will see incremental costs due to breakage of credit chain," Mohan said.

M.S. Mani, Partner, Deloitte India, said, the real estate sector needed rate reductions to prop up sales. "The reductions announced today for normal housing and specially for affordable housing could lead to an uptick in demand. With these reductions, the GST on normal under-construction apartments would be a little lower than prior to introduction of GST and affordable housing would be significantly lower than before," he said.

"The combination of the increase in the threshold to be termed as affordable housing together with the lower rate of 1 per cent could lead to significant upswing in demand. The lower rates would lead to a revival of demand for under-construction apartments, which had tapered down as buyers were preferring ready apartments that did not attract any GST," the Deloitte India partner said.

"Having certain categories that are not eligible for input tax credits is an aberration of the basic principles of a good GST, in addition to issues of traceability of transactions and making the transactions opaque," Mani said.

Jaitley also said the lottery issues have been referred back to the GoM. A GoM had suggested a single rate of 18 per cent or 28 per cent on lotteries, which are of two types -- state-organised and state-authorised.