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The GST Council has now permitted real estate developers to exercise one time option between old GST rates and the new ones for under-construction residential projects to help resolve issues pertaining to input tax credit. This, as per real estate experts, will provide flexibility to realtors to go for the best possible tax option.

What this means is that builders will now get a one-time option to continue paying tax at the old rates (effective rate of 8 percent or 12 percent with Input Tax Credit or ITC) on ongoing projects (buildings where construction and actual booking have both started before April 1, 2019, but which will not be completed by March 31, 2019). These changes made by the GST Council would have substantial impact on real estate sector as realtors would now have to work out which option works best.

The new tax rate of 1 percent for affordable houses and 5 per cent for others, without ITC, will apply on new projects. What this means is that the new composition rates would be mandatory for all projects for which construction starts after 1 April 2019 and hence such tax blockage would need to be factored at time of budgeting.

In an attempt to revive housing sales and address complaints received from homebuyers that some developers were not passing on the benefit of input tax credit, the Goods and Services Tax (GST) Council on February 24 had slashed tax rate on under-construction residential properties, making the effective tax rate 5 percent for the normal category and 1 percent for the affordable housing category. In both cases, no input tax credit (ITC) can be claimed by developers. The new rate will be applicable from April 1, 2019.

Most developers had not reacted positively to last month’s announcement of the new GST rate minus ITC. That was because they were worried about its impact on the input stock which they had already bought before as part of their long-term purchases.

This, say experts, will help address apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits. It is a smart move by the government, as now the developer, will choose an option which is beneficial and may not compel homebuyers to pay an additional amount on account of the changes. They cannot charge incremental basic sale price from the buyers due to the flexibility offered to them for ongoing projects and bookings before April 1, 2019.

“With the option to under-construction properties for transitioning to new rates, it is time to go back to spreadsheets and undertake a quick input tax credit vs. lower tax rate cost-benefit analysis.” said Harpreet Singh, Partner, Indirect Tax, KPMG.

Deloitte India Partner M S Mani said the pragmatic move to segregate under construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit, adding “This would also enable them to price the loss of input tax credits in the new projects.”

Builders with healthy sales traction expected to continue to earlier regime

Giving developers a choice of tax regime for ongoing projects has brought some reprieve to developers’ concern on the loss of Input Tax Credit (ITC) in the new regime. The choice of selecting the GST regime would depend on the respective project dynamics. The ones with healthy sales traction are likely to continue with the earlier regime to maintain their profitability. The consumers nonetheless will expect developers to charge lower GST rates in line with the new tax regime, which might affect margins. However, for projects with slower sales velocity, the developers may change course as the stimulation of demand will far outweigh the adverse impact of ITC withdrawal on developer margins, explains Shishir Baijal, chairman and managing director, Knight Frank India.

CREDAI national president Jaxay Shah says that the sector is happy that the Government has taken all precautions to ensure a smooth and easy transition to the new regime of rates, and allowed the option to follow the existing rates for ongoing projects.

15 percent commercial space within a residential project to be treated as residential property

The council also clarified that projects with up to 15 per cent commercial space such as office, shops etc. will be given the same tax treatment as residential property. This will resolve issues faced in cases where buildings have commercial amenities such as clubs and restaurants as well as in case of residential-cum-commercial projects. This decision has been taken keeping practical issues in mind as most of these commercial establishments within a residential society have been set up to primarily serve the residents of the residential complex.

80% of raw material procurement should be from registered vendors

A condition to avail the lower GST rate  that has been imposed  is that 80 per cent procurement by developers should be from registered dealers.

The new tax rates of 1 per cent (on the construction of affordable houses) and 5 per cent (on other than affordable houses) shall be available subject to the condition that input tax credit shall not be available and that 80 per cent of inputs and input services shall be purchased from registered vendors.

Any shortfall in purchases according to these norms would be levied a reverse tax of 18 per cent. Tax on cement purchased from unregistered person shall attract a 28 per cent duty.

Making it mandatory for developers to purchase raw material from registered vendors is an attempt by the government to formalize one of the key unorganized sectors in the country. Eventually, with more vendors forced to get registered in the future, instances of black money transactions may also come down, say experts.

Will prices increase?

One apprehension being raised post the February 24 announcement was on the possible price rise due to new tax structure.

Most developers reacted to last month’s announcement of the new GST rate minus ITC with trepidation. There was justifiable worry about what would happen to the input stock which they have accumulated much before as part of their long-term purchases. For them, this new move will be beneficial. However, developers choosing to go with the second option of new GST rates may not be able to hike property prices in the immediate future. The possibility of prices being hiked was a matter of concern for aspiring buyers, but the fact is that developers can ill afford to test the currently fragile market sentiment by raising rates immediately, says Anuj Puri, Chairman – ANAROCK Property Consultants.

Concurs Deepak Kapoor, director, Gulshan Homz and ex-President, CREDAI Western UP, the sector has to work fast to make sure they are ready to implement the new rate cut after finalising their cost of project and sale price. “The biggest challenge would be to communicate to the customer about the revised pricing. We do not expect that rates will change drastically looking at the market situation, but we are sure of the positive effects that this change will have on the overall sentiments of the real estate market,” he says.

Finally, the GST Council’s transition plan announced on Tuesday has also clarified that all transfer on development rights (TDR), FSI and long term leases will not be liable to tax provided the 1 percent and 5 percent GST have been paid for as per the rules for the houses that have been constructed within the residential complex.