The Goods and Services Tax (GST) Council, in its 34th meeting through video-conferencing on Tuesday, allowed builders to choose between a 12 per cent rate with the option of input tax credit (ITC) or 5 per cent without it, and in the case of affordable housing projects, an 8 per cent rate with tax credit or a 1 per cent rate, for buildings where both construction and actual booking have started before April 1.
The reduced rates, decided in last month’s meeting, will kick in from April 1.
It is learnt that the Council converged towards the decision after about 10-15 states including both Opposition-ruled states such as West Bengal, Punjab along with Maharashtra and Gujarat spoke in favour of giving the option between the old and the new rate structure. It was felt that in absence of denial of tax credit, the margin of developers will be hit and the prices will not get reduced as per expectations, officials said.
In its 33rd meeting held on February 24, the Council had cut the GST rate for residential housing to 5 per cent and for affordable housing to 1 per cent along with removal of ITC from the effective rates (after one-third abatement of land) of 12 per cent and 8 per cent, respectively. Also, the definition of affordable housing was redefined by linking it to cost as well as carpet area: flats up to Rs 45 lakh and with carpet area of 60 sq m in metros (Delhi-NCR, Bangalore, Chennai, Hyderabad, Mumbai-MMR, Kolkata) or 90 sq m in non-metro areas.
The Council, in Tuesday’s meeting, finalised the transitional rules, deciding that the new rate structure shall be applicable for all new projects after April 1. The lower rates will apply to houses whether booked prior to or after April 1 for ongoing projects. In case of houses booked before the transition date, it will be payable on instalments on or after April 1.
Commercial apartments such as shops, offices etc in a residential real estate project in which the carpet area of commercial apartments is not more than 15 per cent of total carpet area of all apartments will also be eligible under the new tax structure, an official release said.
The option of choosing between the two tax rate structures for under-construction buildings as on April 1 has to be exercised within a specified time, which is expected to be notified shortly.
The GST Council also decided to introduce a minimum sourcing norm of 80 per cent of inputs and input services (other than capital goods, TDR/ JDA, FSI, long term lease (premiums) from registered persons. “On shortfall of purchases from 80 per cent, tax shall be paid by the builder at the rate of 18 per cent on reverse charge mechanism (RCM) basis. However, tax on cement purchased from unregistered person shall be paid at the rate of 28 per cent under RCM, and on capital goods under RCM at applicable rates,’’ the release said.
Decision to end ITC could adversely impact developers
The approval of the optional scheme for under-construction projects has been a demand of the real estate industry and this decision offers greater clarity on taxation of under-construction houses, especially those sold during the transition to the new tax system. While the Council’s decision to cut the GST rate on under-construction and affordable homes is being seen as a positive, analysts are of the view that the decision to end input tax credits could adversely impact developers, which could have a cascading impact on home-buyers. The removal of input tax benefit is seen as a move that could likely hit the margins of builders.
In case the builder opts for the reduced rates, the transition formula for ITC will be linked to factors such as percentage completion of construction, booking of flats and invoicing.
Industry experts said the choice of selecting the rate structure would depend on the respective project dynamics. “The ones with healthy sales traction are likely to continue with the earlier regime 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,” Shishir Baijal, chairman & MD, Knight Frank India said.
However, they also said it would ease compliance. “Providing choice to realtors to opt for the reduced rates or continue with existing rates with input tax credit for ongoing housing projects shall make compliance easier for them. Further, the clarification on use of up to 15 per cent space for commercial purposes in a mixed project and reversal of tax proportionate to area is welcome as the issues of applicability of reduced tax rates stands resolved,” Chandrajit Banerjee, director general, CII said.