The approval of the transition plan, which allows opting between the old and the new Goods and Services Tax (GST) regime, has provided the much-needed respite to the developer community. With this, developers now enjoy the flexibility to choose between the GST rate cut with or without Input Tax Credit (ITC).
The rationalisation of the Goods and Services Tax (GST) had been the foremost demand of the real estate sector. The long-pending behest has been recently met when the government decided to reduce the GST rate from eight percent to one percent on affordable housing projects costing up to Rs 45 lakh, and 12 percent to five percent on under-construction units. While the homebuyers welcomed the move, the decision did not go down well with the developer community. Lack of clarity on the imposition ofInput Tax Credit (ITC)and the effectiveness of the new GST rate not only created utter confusion amidst developers but challenged their business operations, too.
Therefore, in an attempt to clear the doubts pertaining to the new tax rate and relieve the developer fraternity of the burden imposed by removal of ITC, the GST Council announced a transitional policy that seems to address the pain points of the realtors.
As per the announcement, builders with under-construction residential inventory as on March 31, 2019, have an option to choose between the old and the new tax rate. Here, old tax rate implies 12 percent GST with Input Tax Credit (ITC) wherein builders can adjust the taxes paid on the purchase of construction raw materials such as steel and cement against the final taxes paid on the under-construction properties. Whereas, the new tax rate means that builders can pay five percent GST without availing the benefit of ITC.
The government also mandated levying the new tax rate on all under-construction residential projects commencing from April 1, 2019, onwards. Moreover, all real estate developers have to purchase 80 percent of construction goods and services from GST-registered vendors. The decision has been taken to curb the procurement of construction inputs from unorganised sectors.
The industry sees the GST council’s recent announcement in a positive light since it solves all the issues pertaining to the ITC transition for the ongoing projects and is a big relief for developers.
Here’s what a few of real estate industry stalwarts are opining about the move -
Niranjan Hiranandani, National President, NAREDCO
The GST council has addressed the transition issues on the Input Tax credit for the ongoing projects by making it flexible for the developers to choose between the old GST v/s new GST schemes. This will allow the developers to opt between two GST schemes available i.e. old GST rate with ITC or apply a reduced rate of GST without ITC for the under-construction projects to avoid operational hassles. Besides, developers can also choose to have old and new GST rates for different buildings in the same project. Overall, the reduced GST on under-construction units will surely enhance the customer’s confidence and develop a positive scenario to further garner sales.
Rakesh Reddy, Director, Aparna Constructions
The transition plan is widely appreciated as it will give adequate time to builders to adapt to the new tax structure. We thank the GST Council for an excellent decision taken on the transition policy as it will revive both home building and buying sentiment. The new move combined with the implementation of Real Estate (Regulation and Development) Act (RERA) 2016, will boost the housing demand and firmly revitalise the sector.
Rajan Bandelkar, President, NAREDCO Maharashtra
With this move, the developers who have passed on the ITC in the past can continue with the old rates of 12 percent or can reverse Input Credit and continue with new five percent GST. For the developers who we were not able to sell because of high GST of 12 percent will now be able to sell those inventory with a lower tax rate. Overall, it is a very positive move and will surely benefit the real estate sector.
Madhusudhan G, Chairman and MD, Sumadhura Group
The latest GST announcement certainly favours the developer community by making it flexible - to choose between old GST rates with an ITC or the new reduced GST rate of five percent without ITC. Also, this new tax structure for real estate solves the transition issues on ITC for the ongoing projects and is a big relief for developers.
Jaxay Shah’s, National President CREDAI
The real estate industry is particularly happy that the Government has taken all precautions to ensure a smooth and easy transition to the new regime of tax rates, and allowed the option to follow the existing rates for ongoing projects. Overall, the period of wait and watch as regards to GST for both the industry and the consumers are now over.
Pradeep Aggrawal, Co-founder and Chairman, Signature Global and Chairman, National Council on Affordable Housing, ASSOCHAM
The Council has cleared the air about the ITC benefits. Now, developers have an option to go with the old GST rates in case they have already passed on the benefit to the buyers and decided the sale price of the projects launched before April 1, 2019. Besides, developers have to undertake necessary changes in the system (IT, documentation and processes) to meet the deadline before April 1. The decision of launching new projects should also be taken at the earliest since consumers would be expecting a reduction in prices. Also, the revised pricing has to be communicated to the end-buyers.
Ankur Dhawan, Chief Investment Officer, PropTiger
Option to choose between 12 percent GST with input tax credit versus reduced rate without input tax credit will confuse customers. Customers will prefer reduced rates whereas developers might prefer higher rates with ITC. We can expect many more disputes and cases in anti-profiteering authority in coming days.
Rajesh Goyal, MD, RG Group & Vice president, CREDAI NCR
The GST council’s latest decision to solve the transition issue that developers were facing is viewed in a good light. Since, most of the developers have already bought the raw material for projects launched before April 1, 2019; the confusion about the GST charges levied on the buyer prevailed. However, now, developers can breathe a sigh of relief as they can opt for old GST rates with ITC to charge 8 and 12 percent GST to the buyer. Overall, the markets are expected to improve since tax rates for newer projects will be five percent and one percent. This would mean more people will buy homes now.
Vikas Bhasin, MD, Saya Homes
For older projects developer will go for old rates and hence the fear of losses is gone. Now the sector can get back to delivering homes to the buyers according to the demand. After April 1, we may see an upsurge in houses that will fall in the category of affordable homes as per the GST Council’s definition.
Ashok Gupta, CMD, Ajnara India Ltd.
The GST Council’s decision to provide developers with an option to either go with the old rates with ITC or choose the newer GST rates without ITC is a welcome move. It is beneficial for developers who had already worked out the sale price after factoring in the input credits of the project and had already passed on the benefits to the customers.
Deepak Kapoor, Director, Gulshan Homz & Ex-President, CREDAI Western UP
With the new GST rate regime coming into effect from April 1, 2019, the affordable segment is expected to witness increased demand. However, the realtors have 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 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.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
The announcement of giving developers a choice of the 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 tax rate 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.
Rohit Poddar, Joint Secretary, NAREDCO West and Managing Director, Poddar Housing and Development Ltd:
The decisions taken by the authorities have given immense relief to the developers as the option to go with the older GST structure is still available. While the new GST rates for ongoing under-construction properties may hit the margins for developers, the power to choose between old and new rates will be favourable for the developers and buyers both. Overall the decision is in favour of ongoing under- construction properties and stable growth will be visible in the sector.
Amit B Wadhwani, CO-founder, Sai Estate Consultants Chembur Pvt Ltd (SECCPL)
All the reforms that have been made in the past couple of years are aiming towards a singular goal of making Indian real estate more organised and benefit homebuyers. Mandating 80 percet of material procurement from registered dealers is an essential step towards ensuring increased professionalism in the industry. Similar to the implementation of RERA, both ITC and mandating of registered dealers will see a teething phase in the industry but will eventually help stakeholders across the industry and lead to consolidation. It is interesting to note that 15 percent of commercial places too will be treated as residential for GST implementation. Clarity on the same will be required to help developers understand the implications and accordingly market and price their property.
J C Sharma, Vice Chairman and Managing Director, Sobha Limited
We believe that the reduction in GST rate from 12 percent to five percent without allowing input tax credit (ITC) may not have the desired impact on the overall cost of buying a home.
With this decision, the developers will be required to rework on their prices. While the basic price per square feet cost of an apartment is likely to go up due to the increased cost of construction, the tax slab is expected to go down. We hope that at some point good sense will prevail with the GST council and they will allow developers to take ITC benefit while keeping the GST rates low, enabling them to bring down the overall cost of owning a home.