The slowdown encountered in the real estate sector, especially in the residential segment, had been attributed to various reasons including the imposition of high rate of Goods and Services Tax (GST). It is instructive to note that prior to the GST era, under-construction apartments attracted nearly 4.5 percent service tax and 1-1.5 percent VAT, adding up to 6 percent.
In this backdrop, a GST rate of 18 percent with a 33 percent abatement for the value of the land, leading to an effective rate of 12 percent was considered very high.
It must, however, be noted that prior to the introduction of the GST, builders were not eligible for credit on their key inputs such as cement, steel and tiles and hence considering the input tax credits (ITC) that would accrue to the builder, the actual impact would be much lower than 12 percent.
The proportion of credit that a builder would have been eligible for viewed as a percentage of the project/apartment cost, would depend on various factors such as the land cost, the construction cost, the purchases of inputs from registered dealers, the percentage of apartments sold at under construction stage etc. There were several complaints that the builders were not passing on the ITC benefits to buyers and were indulging in profiteering.
In the absence of a ballpark to estimate, the proportion of input tax credits that a builder would be eligible and considering the fact that anti-profiteering investigations on builders was proving to be a very complex process, the GST Council has now gone ahead and slashed the rate on normal houses to 5 percent without input tax credit.
This effectively means that the apartment buyer pays a flat rate of 5 percent and does not need to verify whether the ITC benefits have been passed on or not. This makes the practice similar to that in case of restaurants, which had seen a similar reduction from 18 percent with ITC to 5 percent without ITC in the past, in a move that was widely hailed as imparting simplicity to the GST regime.
The changes made are even more impressive in case of affordable housing, where the carpet area limits have been increased to 60 sq m in case of metros and 90 sq m for others, with a common value cap of Rs 45 lakh.
Apartments fulfilling these criteria will now attract a GST rate of 1 percent as compared to the earlier rate of 8 percent, obviously with no ITC eligibility in the hands of the builder. Hence for an apartment costing Rs 45 lakh, the applicable GST would be just Rs 45,000, which most buyers may not mind paying as it satisfies both the basic tax tenets of simplicity and reasonableness.
The reductions make the GST rates on the real estate sector very reasonable and simple for buyers of apartments. While builders will have issues on account of denial of ITC, it does appear that the move is in line with the surge in rate reductions on various products that we have seen in the recent past.
It is quite likely that with this round of reductions, the GST Council would temporarily press the pause button on rate reductions, evaluate the impact on collections and then move ahead with the next stage of reforms.
(The writer works with Deloitte India)
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Updated Date: Feb 25, 2019 19:47:24 IST