Whether or not the anxious housing realty market will experience an increase in its sales volume due to the recent GST reduction, remains a question. The industry executives feel that the slashing of Goods and Services Tax to 1% and 5% are not adequate for bringing stability to the cash-strapped developers.
As announced by a Government body on last Sunday, the GST levied on residential houses in the under-construction category will become 5% April 1 onwards, from the existing 12%. The projects at a lower price belonging to the affordable category will attract 1% tax instead of the present 8%.
This move is one of the string of measures taken by the Government as an effort of reviving the consumption of Real Estate prior to the elections in May. In the words of the country’s Finance Minister, the change in the Real Estate tax will uplift housing for all.
The Real Estate market will get a break from the ongoing slowdown as a result of the cut in the GST rate. Nonetheless, the market will experience a positive sentiment of buyers even that be for a short span of time.
Real Estate project failures and increasing bad debts are making banks careful in terms of lending money to the developers. As both the buyers and builders are greatly dependent on the money borrowed, the property market is now sluggish.
The implementation of GST and demonetization are two of the major economic reforms by the Prime Minister that have wounded the Real Estate sector. The sales of affordable homes are anticipated to increase following the changes in tax since a large number of buyers who have hesitated to take the plunge, will reap the benefit. The inventory of affordable housing will diminish within the following 12 months, subsequently.
At present, the Indian realty market possesses unsold inventory that equals to accumulation over 2 years. 50% to 60% of this comprises affordable housing.
The basic property prices are still beyond the reach for the greater chunk of the population while a huge number of under-construction projects remain unfinished.
But the Government’s decision to do away with Input Tax Credits (ITC) will undercut the upcoming cut in sales tax that is now being considered a boon. The presence of ITC would allow the developers to claim the privilege endowed to the payment of tax during the purchase of construction materials, which would consequently free them from the tax burden.
According to the authorized Real Estate analytics, the marginal increase in housing sales won’t be able to influence the developer margins for the better since transaction values on a whole are dipping and construction costs are likely to increase due to the rejection of the Input Tax Credit.
Cement attracting GST at the rate of 28% remains unchanged, which will keep the construction costs high. The losses faced due to the eradication of Input Tax Credit might be passed onto the consumers by some developers through a proportional increase in the agreement value, as told by industry sources.
Experts feel that the Government should enhance the cost and supply of liquidity for HFCs from where both builders and buyers require to borrow money. Only then will there will be an uplift of the housing sales.
The advantage of GST rate reduction can be fully reaped only if low-cost financing options through HFCs are open to the interested home buyers.
Is Input Tax Credit a Necessity for the Real Estate Sector?
The recent decision of the Government to slash the GST Rate from the existing 8% to 1% in the affordable housing category deprives the builders of the benefit of ITC (Input Tax Credit). Similarly, the reduction in tax from the previous 12% to 5% for the premium residential segment excludes the ITC benefit. The move aims at improving sales in the realty sector.
According to analysts, the exclusion of ITC (Input Tax Credit) prior to the general elections is likely to bring black money back to the Real Estate sector that is famous for utilizing tarnished wealth.
The presence of Input Tax Credit (ITC) earlier, not just minimized the construction cost but also kept the utilization of black money by the Real Estate industry at bay. At least, the normal housing sector attracting 5% GST should not have been deprived of Input Tax Credit, by the Government.
With the removal of ITC (Input Tax Credit), the inter-linkages through which the entire transaction could be monitored by GST has been broken. This results in an opaqueness in the system, making way for black money. Therefore, all the transparency brought in by the enactment of GST will go in vain.
As stated by the Finance Minister, a large percentage of the inputs will have to be purchased by the builders from GST-registered dealers. A committee will decide the movement to ensure that the road to cash is blocked for the realty sector. But at the same time, monitoring input utilisation would be difficult at such a small level since the construction and Real Estate are local subjects.
In the opinion of a realty expert, the GST Rate cut has turned out to be both advantageous and disadvantageous for the realtors. There may be a marginal increase in the demand of end-users for the short-term but ultimately, the profitability of the developers is likely to be affected. A hike of 2% to 4% in the property prices is necessary for the developer to maintain the margins, which is quite a challenge in the given market status.
As figured out by another Real Estate specialist, the timing of this GST Rate cut is an important factor. So far, builders were tensed due to lower sales during the period ahead of the elections. The removal of GST altogether from all segments of residential properties would be ideal to seriously speed up the market.
Homes to Become More Affordable for Buyers
The GST Council’s decision of reducing the tax rate in its 33rd meeting on last Sunday was welcomed by the country’s Real Estate industry as a positive move. Previously, the premium housing attracted 12% GST including Input Tax Credit but the new rate of 5% is devoid of ITC.
According to the realty watchers, the new rates fixed by GST Council is expected to make housing units of the premium segment enter the affordable category in a relatively large number. Reports state that the leading 7 cities of the country account for nearly 5.88 lakh under-construction units that haven’t been sold. Only 34% of these cost less than 40 lakh rupees. The affordable housing unit is now defined by a price within 45 lakhs and thus, these unsold properties also qualify for this category, thereby increasing the supply for buyers. Both of these factors will accelerate housing sales in the affordable segment.
Developers lacking in cash were in the hope of a government intervention to assist in improving their sales volumes. This reduction in GST will encourage housing sales if not for the long-term since the buyers who have been postponing their decision of property purchase so long will now get motivated to act.
The gap between demand and supply is likely to be narrowed down by this laudable decision of the GST Council to bring down the existing tax rates to 1% and 5% on affordable and premium housing categories, respectively. This move has greatly relieved the buyers though the benefit of ITC has been rejected.
Had the announcement been immediately put into effect, the current year would have witnessed sales in the housing market. With the date of enactment is April 1, the increase in sales can only be seen in the following financial year.
In the opinion of a developer, this move of the government is concerned with buyers for the developers will have to deal with the burden of paying GST to the suppliers, contractors, agencies and vendors. As a result, their costs will increase coupled with the already narrow margins due to the implementation of potent governmental policies.
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