New Delhi: A ministerial panel led by Gujarat deputy chief minister Nitin Patel has come out in favour of lowering the goods and services tax (GST) on under-construction properties to 5% without credit for taxes paid on raw materials. The seven-member panel, which met in the national capital on Friday, also favoured lowering GST on affordable housing from 8% to 3%, said an official on condition of anonymity.
The ministerial panel was set up in January to consider a scheme to boost the real estate sector which is struggling with record inventories. At present, the effective rate of GST on under-construction properties is 12% after allowing for the cost of land, which is out of the purview of GST. Properties where the construction has been completed attract stamp duty, not GST.
The panel examined the quantum of tax cut needed in the housing sector, according to the official mentioned above. “Real estate is a major industry after agriculture. We are working out tax relief for residential flats. Recommendations on real estate will be finalized in two or three days," said the official.
The move to lower the tax rate sharply with no input tax credits is aimed at giving relief to homebuyers, but it remains to be seen whether the federal indirect tax body, the GST Council, will approve it without changes, considering the complications involved. Denial of rebate for the taxes already paid on raw materials could lead to padding up of cost and result in an increase in the price of the final product. Cement, for example, is taxed at 28% and accounts for roughly a fifth of the construction cost, for which the builder will not be able to claim credit if the ministerial panel’s proposal is implemented without modifications.
Experts said that while the intention of the government is to provide relief to the end customer, from a structural standpoint it is desirable to ensure that the chain of GST credit is not broken. “Perhaps a better approach would be to reduce the prevailing GST rate on residential property, by say bringing the effective tax rate down to 8% from 12%, while continuing the benefit of input tax credit," said Pratik Jain, partner and leader of indirect tax, PwC India.
“For properties where the cumulative impact of tax cost on account of denial in credits and 5% output GST rate is less than the current 12% rate, this rate cut would be quite positive. However, where the cumulative cost is higher than 12%, this rate reduction could entail an increased tax cost," said Abhishek Jain, tax partner, EY.
The GST Council has been slashing tax rates to give relief to consumers despite the impact it has on the exchequer. Revenue secretary Ajay Bhushan Pandey said in an interview in Mint on Monday that because of the rate reductions, benefit amounting to almost ₹90,000 crore a year has been given to consumers.
Builder lobbies, including the Confederation of Real Estate Developers’ Association of India (Credai) and the National Real Estate Development Council have been demanding a reduction in the GST rate for a while now.
The GST rate, particularly in the luxury real estate segment, has been a source of pain both for homebuyers and developers.
Real estate stakeholders and developers said if the group of ministers’ recommendation to reduce GST rates to 3% and 5%, respectively, in affordable housing and other under-construction projects is accepted, it will help boost home sales.
“This (reduced rates) will breathe new life into the sector. The existing GST regime has been a major deterrent for sales in under-construction projects," said Shishir Baijal, chairman and managing director, Knight Frank, a real estate advisory firm.
According to Jaxay Shah, national president Credai, it will boost consumer sentiment and bring back homebuyers who have been staying away because of high GST. “These positive intentions should translate into homebuyers who had earlier deterred home purchase to now go ahead and buy the property of their choice... The growth in volume of housing sales which we shall soon see would add to the advantages of GST regime and spur real estate-led economic growth," Shah said.