Providing massive relief to home buyers, the 33rd GST Council meeting on Sunday, 24th February, 2019, lowered the GST rate on under-construction houses to 5% (five percent) from the earlier 12% (twelve percent). For affordable housing, the earlier tax rate was 8% (eight percent) which is now reduced to 1% (one percent). These rates will come into force from 1st April, 2019, if brought into force by a notification in the Official Gazette.
Definition of 'Affordable Housing'
The definition of 'affordable housing' under the GST law has also undergone a change. The earlier definition read as under:
""Affordable Housing" is defined as a housing project using at least 50% of the Floor Area Ratio (FAR)/Floor Space Index (FSI) for dwelling units with carpet area1 of not more than 60 square meters."
The new definition however, has a two-fold requirement to classify housing as 'affordable'. Affordable housing in metro cities, namely Delhi NCR region, Mumbai MMR region, Kolkata, Chennai, Hyderabad, and Bengaluru, will include properties with a carpet area up to 60 (sixty) square meters and cost up to Rs.45,00,000/- (Rupees forty-five lakh). For non-metro cities, properties with a carpet area of 90 (ninety) square meters and cost up to Rs.45,00,000/- (Rupees forty-five lakh) will fall under the affordable housing segment.
Withdrawal of Input Tax Credit
The earlier benefit of input tax credit will now be withdrawn after the coming into force of the revised GST rates as it was felt that the developers failed to pass on the benefits of the input tax credit to the home buyers. Thus, by reducing the GST rate, the home buyers will be directly benefited in turn making the tax applicability and real estate transactions more transparent.
For those developers that passed the benefit of input tax credit to the home buyers, its withdrawal may lead to increased pricing of properties. The withdrawal of the input tax credit may, for a few months adversely affect the prices of houses as the developers may seek to recover the loss suffered by them due to withdrawal of input tax credit by increasing the prices. However, the problem of unutilized tax credit which was a cost for the developer on completion of the project is now dealt with as the same is withdrawn. This should lead to better pricing of properties in the coming months.
GST exemption on TDR, JDA, Lease (premium) and FSI
The 33rd GST council meeting has also decided that an intermediate tax on Transferable Development Rights (TDR), Joint Development Agreements (JDAs), long-term lease (premium) and Floor Space Index (FSI) shall be exempt only for such residential properties on which GST is applicable. This should facilitate better cash flows in such transactions.
On-going Projects
With regard to those properties where construction work has already begun, transition rules and guidelines will be drafted by the tax authorities to provide clarity on applicability of GST on such projects/properties.
Conclusion
The Government has brought about the change in
the GST rates in order to boost demand for real estate
due to the recent slow-down in the sector. This move should not
only drive sales but also promote developers to undertake
affordable housing projects. All in all, these changes seek to make
the tax structure more transparent, the tax compliance easier and
less cumbersome for developers. We can anticipate a rise in the
real estate prices till April 2019 due to the withdrawal of input
tax credit. However, the prices may start to see a decreasing trend
after the revised GST rates are implemented. Though the elimination
of input tax credit benefit may temporarily hit profitability of
the developers, higher demand is anticipated over the coming months
as a result of this move resulting in greater sale and increase in
revenues for the developers. This makes it a win-win situation for
both, the developers and the home buyers.
Footnote
1. "carpet area" shall have the same meaning as assigned to it in clause (k) of section 2 of the Real Estate (Regulation and Development) Act, 2016.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
