GST Council's plan for real estate sector may not find many takers

Sector seeks expansion of price band of affordable housing, lower tax on cement, pins hopes on post-poll reforms

The Goods and Services Tax (GST) Council’s decision to give developers the power to choose between the old and new tax rates might not find many takers, industry experts have said. According to many developers, the demands they had from the GST Council have not been approved. 

Many claim that by giving this option, the government has side-stepped from its responsibility and the move would make the whole tax process cumbersome and chaotic. “The realty sector is already loaded with multiple legislations restrictions. Regulations in the GST under the garb of tax reduction would push the sector further into an economic cycle,” Rajat Mohan, partner, AMRG and Associates, said.

Others believe that these might complicate plans of a potential home buyer. “The options are confusing as well as tricky for developers. It will create more chaos in the industry, though customers may want to make use of the situation. If some developers want to charge 5 per cent and we charge 12 per cent, buyers may change their mind, though they will have to pay a similar amount,” said Paresh Verma, vice-president, finance, at Mumbai-based Wadhwa Group. 

On Monday, a number of developers met Finance Minister Arun Jaitley to put forward their requests, which would be submitted to the GST Council. According to sources, the industry had said they wanted the price band of affordable housing to be increased from the present Rs 45 lakh to close to Rs 1 crore. 

“In the Mumbai region, areas in Delhi-NCR, the price range of a house is anywhere between Rs 55 lakh and Rs 90 lakh. This (increase in price band) would help bring a larger number of projects under the affordable housing scheme. If the government wants to provide housing for all, it has be in areas where property rates are already higher,” said a source, who was part of the meeting.

Developers said expanding the affordable housing scheme price band and lowering the 28 per cent GST on cement would have had a bigger impact. “If the developers choose to avail input tax credit (ITC) and continue with the old GST system for under-construction projects, it could hamper demand as customers shall consider waiting out for new launches with lower GST, or go with projects offering new rates. It would have been logical if the GST Council would have just enforced new rates for new projects, only to avoid commotion among buyers and developers,” said Parth Mehta, managing director, Paradigm Realty. 

Industry experts said the earlier regime was beneficial for developers as they could set-off the tax paid on inputs against the GST collected from buyers. “Denial of ITC effectively adds to their costs, thereby squeezing the margins. Consumers would prefer the new tax regime, as they rarely had any clarity on the extent of ITC which was being passed on to them. Further, the percentage of ITC varied from project to project and developer to developer. There is no way to ensure that that the ITC was passed on to the buyers,” said Arvind Nandan, executive director, Research at Knight Frank India. 

However, real estate body NAREDCO said developers could now choose the option that suits them better. “It shall depend on the stage of the construction of a project and construction-linked payment. This means in some projects, the earlier GST structure may prove beneficial, while in some other projects the new GST structure shall be beneficial,” said Vice-Chairman of NAREDCO and Tulip Infratech CMD Parveen Jain.