GST cut to boost sales of under-construction flats; no input tax credit may hit builders' profit margin: Moody's

Credit rating agency Moody's on Wednesday said the GST rate cut on under-construction flats will boost housing sales, but may hit profit margins of builders with the withdrawal of input tax credit

Press Trust of India February 27, 2019 13:56:55 IST
GST cut to boost sales of under-construction flats; no input tax credit may hit builders' profit margin: Moody's
  • The GST Council had on Sunday decided to cut GST rate on affordable homes to 1% without input tax credit (ITC) from earlier 8% with ITC

  • GST on under-construction flats, which is not under the affordable housing segment, has been reduced to 5% without ITC from earlier 12% with ITC

  • The reduction in GST rate on affordable housing is in line with the government's increased focus on this segment, Moody's said

New Delhi: Credit rating agency Moody's on Wednesday said the GST rate cut on under-construction flats will boost housing sales, but may hit profit margins of builders with the withdrawal of input tax credit.

The GST Council had on Sunday decided to cut goods and services tax (GST) rate on affordable homes to 1 percent without input tax credit (ITC) from earlier 8 percent with ITC.

The GST on under-construction flats, which is not under the affordable housing segment, has been reduced to 5 percent without ITC from earlier 12 percent with ITC.

"The reduction in GST is credit positive for India's property developers...because the reduction in tax will boost demand and increase sales of properties under construction," Moody's Investors Service said in a statement.

GST cut to boost sales of underconstruction flats no input tax credit may hit builders profit margin Moodys

Representational image. Reuters.

"India's real estate sector has weathered difficulties in the last few years amid price reductions from a glut of inventory and lacklustre demand. The reduction in GST will improve housing affordability as the amount to be paid by a potential house buyer will be reduced, which will increase demand for property," it added.

The reduction in GST rate on affordable housing is in line with the government's increased focus on this segment, Moody's said.

"The new GST measures eliminate the ability to claim the input tax credit, which may hit the profitability of the developers," the rating agency said.

Currently, the developers are able to reduce the tax liability when it makes a sale by claiming tax paid on goods and services required for the construction of properties. "This will further impact developers' profit margins that are already under pressure."

Moody's said that the developers have the option to mitigate this loss by increasing prices slightly given that overall pricing for the customer has reduced with lower GST.

Meanwhile, Fitch Ratings said the move to reduce the GST on under-construction properties and expand the scope of the affordable-housing category would improve affordability and support demand.

"We believe this will boost consumer sentiment and cut transaction costs, which can be as high as 18 percent in Mumbai after including other taxes, such as stamp duty, surcharge and registration fees," it said.

"The measure also withdraws input-tax credits for developers, but we still expect marginal savings on overall transaction costs and more so for affordable housing as well as improved buyer confidence, as the measure eliminates ambiguity as to whether property developers are adequately passing on input-tax credit to buyers," Fitch said.

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