Goods & Service Tax (GST) Council’s decision to slash tax rates from 12 per cent to 5 per cent for under-construction properties and from 8 per cent to 1 per cent for affordable housing has eliminated bottlenecks in governments vision of 'Housing for all by 2022', bringing middle class a step closer to fulfilling their aspirations of owning a home.
Currently, the goods and services tax (GST) is levied at 12 per cent with input tax credit (ITC) on payments made for under-construction property or ready-to-move-in flats where completion certificate is not issued at the time of sale. For affordable housing units, the existing tax rate is 8 per cent.
Doing away with ITC, the new tax rates which would be applicable from 1st April 2019 will directly benefit home buyers as they won’t have to deal with uncertainties surrounding ITC. Getting direct benefits from lower tax rates will bring in more transparency.
The government’s move shows that it was mindful of the fact that benefits of ITC were not being passed on to consumers by some builders, and hence constituted a seven-member group of ministers (GoM) to suggest changes in taxation on real estate. Further, it represents the extent of seriousness among policymakers to ensure speedy implementation of reforms.
The move provides a major boost to affordable housing and is expected to push demand in the sector significantly, subsequently also benefitting real estate players who will get respite from large unsold inventory in this sector.
To ensure that the real estate sector does not go back to cash driven due to the removal of ITC, the government has decided that builders will have to purchase a very high percentage (which will be decided by a committee) of their inputs from GST registered dealers.
The council has also expanded the definition of affordable housing for availing GST benefits to those flats costing up to Rs 45 lakh; measuring 60 square metre carpet area in metros that include Delhi-NCR, Bengaluru, Chennai, Hyderabad, Mumbai-MMR and Kolkata, and 90 square metre carpet area in non-metros.
According to data there are nearly 6 lakh under-construction homes lying unsold in the top seven cities. Of these, 34 per cent are priced below Rs 40 lakh. With affordable housing now being defined within Rs 45 lakh budget, more properties now fall under affordable housing category which coupled with the GST cut will reinvigorate demand in realty sector.
In addition to recent tax sops announced in the interim budget, the GST tax cut introduced will not only revive the real estate industry but also address the liquidity issues facing realty developers for quite some time now.
Market players have long been demanding GST should be entirely removed for all residential property categories for robust growth. Nevertheless, the recent move provides a major stimulus for the industry and is likely to play a vital role in bringing about a bright future for all stakeholders involved.
As an additional boost, considering the current financing crisis in the real estate especially for the affordable housing segment, the government should also look in setting a 5 per cent target for banks to compulsorily lend to affordable housing segment, either under or in addition, to the overall 40 per cent priority sector lending (PSL) targets.
By 2022, which is the deadline for meeting the Pradhan Mantri Awas Yojana (Urban) (PMAY-U) targets of constructing one crore urban dwellings, the banks should be able to easily build up a portfolio comprising of 5 per cent of an incremental book for affordable housing. This will be a big move for affordable housing to grow.
This article has been contributed by Ravindra Sudhalkar, ED & CEO, Reliance Home Finance