GST: Aiding the real estate sector or adding to the woes?

The implementation of the Goods and Services Tax (GST) in 2017 brought much-needed transparency required in the real estate sector. The real estate sector contributes about 7-8% to India's GDP. Reforms like GST provide uniformity in the sector by abolishing the multi-taxation system and making it more streamlined, which positively impacts the country's overall economy.

Since the implementation of GST, the policy has undergone multiple amendments. As per the policy, no GST was charged on ready-to-sale properties with occupation certificates (OCs), whereas 12% GST was applicable on properties without OCs or under construction. In March 2019, the council slashed the tax rate from 12% to 5% for under-construction properties. For affordable housing properties, the rates were revised from 8% to 1%. However, as per the new policy, Input Tax Credit (ITC) benefits were not applicable. Removal of ITC has added to the cost of developers, leading to a rise in property prices for the end-users.

For a typical residential apartment of about 1,000 sq ft, under the new tax regime, the property price increases by about 15-20%, compared to the prices as per the old tax policy. For the same property, revenue for the government increases by 11% per the new regime. However, for the luxury and premium housing segment, the collections for the government would reduce significantly (about 30-35%) as per the new tax regime, as 12% GST would have fetched higher revenues even after the deduction of the ITC.

While some believe that the revised GST policy has added to the costs for homebuyers, others believe that since GST has been around for five years now, the rates have been rationalized by bringing them down to 5%. While purchasing an under-construction property, buyers are benefitted from the launch rates, which are generally lower than the ready-to-move-in prices. Experts believe the GST charges for under-construction properties get subsidized with the lower launch prices. Besides this, buyers can even choose their preferred unit in under-construction properties. Thus, buyers can rationally hover around their choices, GST payable, and the property price.

At the 47th GST council meeting, held in June 2022, the council made following recommendations for the real estate sector:

• GST exemption on renting the residential unit to registered business entities has been withdrawn.
• Preferential Location Charges (PLC) will be treated as part of the consideration for the property. This is likely to reduce the cost for consumers and will aid the real estate sector to a certain extent.
• In case a developer offers a developed plot with basic facilities like roads, drainage, and sewage treatment plant, GST shall not be charged for that development.

With the rise in the cost of input materials and rising inflation, developers prefer returning to the old regime by restoring ITC. Realtors also recommend the government consider the restoration of ITC with an increase in GST from 5% to 8%. Moreover, as of April 2022, the majority (about 90%) of the unsold inventory in the top six cities was under construction. Providing developers the flexibility to opt for the old regime would bring down the prices for under-construction properties, which would not only benefit end users but developers as well to offload their unsold units.

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