In a bid to boost the residential segment of the real estate sector, the GST Council in its 33rd meeting Sunday slashed tax rates for affordable and non-affordable housing. The government cited reports of slowdown in the sector and low offtake of under-construction houses as the reasons.
How have the rates been lowered?
The Council has decided to cut the GST rate for residential housing to 5% and for affordable housing to 1% along with removal of input tax credit (ITC). The new rates will be effective from April 1. 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.
At present, GST is levied on sale of under-construction complex/building/civil structure or ready-to-move-in flats where a completion certificate has not been issued at the time of sale. Sale of ready-to-move-in or completed property does not attract GST if the sale takes place after issuance of completion certificate. GST is payable at 18% (12% for affordable housing) on two-thirds of the property value, with one-third deemed value of land or undivided share of land supplied to the buyer. So, the effective GST rate on under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale translates into 12% and 8% for affordable housing after one-third abatement of land.
Why lower rates?
Though differences emerged between the states and the Centre over the procedural details for the special scheme, all members in the GST Council agreed that the real estate sector needed to be incentivised given the inventory pileup and the slowdown in launch of new projects. Lower offtake restricting money flow in the sector was also among the concerns that led to the lowering of the GST rates. Government officials said as per rough estimates, about 40% of the offtake should happen in the first year of completion of a project, a proportion that has now slipped to about 25 per cent. Also, it was felt that builders were not passing on the benefits of input tax credit to home-buyers as lower prices. Builders and developers were adding the ITC element to the cost and then taxing buyers on the total amount, instead of removing the benefited component of ITC and calculating the tax on the balance.
Why were the states opposing this?
A Group of Ministers on real estate had submitted its report, proposing lowering GST rate on affordable housing to 3% or less and on housing outside the affordable segment to 5%. A Council meeting through videoconferencing had remained inconclusive last week, leading to Sunday’s physical meeting. Some states cited possible revenue loss, valuation of land, breaking of value chain in absence of ITC and sourcing norms for real estate developers as contentious issues. States such as Punjab are learnt to have sought that the formula of taking one-third of the amount of the property as abatement for the value of land should instead be linked to circle rates. The reasoning behind this is also that in cities with lower land value, this deprives states of revenue otherwise due to them. The government clarified Sunday that the revised rates are revenue-neutral as, even currently, the ITC amounts to around 7%.
The Centre’s proposal to introduce an 80% sourcing norm from registered dealers after removal of ITC was also opposed by some states including West Bengal. They said this could lead to use of more cash and result in flow of black money into the sector. Also, Kerala felt inclusion of capital goods in the 80% would mean most of the sourcing cost would be met by purchase of capital goods, allowing builders to buy construction material from unregistered dealers that will give rise to evasion. The states also cited the possibility of instances where a builder meets the sourcing norm at 70%, and questioned what the tax rate would be for the balance 10%.
What still needs to be worked upon?
Though the proposal to revise GST rates for housing from April 1 is final, a committee of officers has been tasked with working out the procedural details regarding transition rules, and norms for reversal of ITC in cases where the builders have taken credit for all units and then sold some of those units with completion certificate. Officials said the 80% sourcing norm is likely to exclude purchase of capital goods so that the major component of the 80% is from purchase of construction material such as cement and sand.
The fitment committee and law committee have been asked to draft the transition rules and frame guidelines by March 10 for properties where construction work has already begun, following which a Council meeting will be held via videoconferencing. The officers’ committee will also examine cases where there is commercial space or shops in ground floors, and whether it should be allowed and if allowed what percentage should be allowed.