GST on real estate: A slightly higher rate with input tax credit could be a better option


The real estate sector has been a priority of the government with its target of ’Housing for All by 2022‘. The sector is also one of the largest contributors to India’s GDP.

However, the real estate sector has been grappling with a slowdown triggered by various issues, including the Goods and Service Tax (GST). Some of the issues are higher tax rates on inputs such as cement (taxed at 28 percent) which lead to an accumulation of input tax credit (ITC), developers not passing the benefit of ITC to customers, high GST rate (i.e. effective rate of 8 percent and 12 percent on affordable housing and other housing categories, respectively), levy of GST on certain transactions like Transferable Development Rights (TDR), Joint Development Agreement (JDA), etc.

Reduction of GST rates has been a long-pending demand from real estate players, including industry associations such as the Confederation of Real Estate Developers’ Association of India (CREDAI) and the National Real Estate Development Council (NREDC).

The GST Council, in order to address the aforesaid issues, made certain announcements at its 33rd and 34th meetings held on 24 February and 19 March 2019, respectively. The key decisions taken during the 33rd meeting, broadly based on recommendations of a ministerial panel led by Gujarat deputy chief minister Nitin Patel, are:

    • GST on affordable housing properties lowered from an effective rate of 8 percent to 1 percent (without ITC). Properties of carpet area of up to 90 square metre in non-metropolitan cities/towns and 60 square metre in metropolitan cities having value up to Rs 45 lakh would qualify as affordable housing.
    • GST on other than affordable housing properties lowered from an effective rate of 12 percent to 5 percent (without ITC).
    • Exemption provided from GST on TDR, JDA, Floor Space Index (FSI) and long term lease premium for residential properties on which GST is payable.

Further, the GST Council at its 34th meeting approved the modalities of transition to the new tax structure. Some of the key decisions taken at the meeting include the following:

    • In case of ongoing projects (buildings where construction and actual booking have both started before 1 April 2019) which have not been completed by 31 March 2019, developers would be given a one-time option to pay tax at the old rates (i.e. 8 percent/ 12 percent with ITC). The option would need to be exercised within a prescribed time frame (to be notified) failing which the new rates would apply.
    • In order to avail the benefit of reduced new tax rates, a condition of 80 percent of procurement of inputs and input services (other than capital goods, TDR/ JDA, FSI, long term lease premium) from registered persons, has been stipulated. On shortfall of 80percent purchases, GST shall be payable by the developer on reverse charge mechanism basis, on procurements from unregistered persons.
    • Proportionate ITC to be allowed as per a prescribed formula in case of ongoing projects transitioning to new tax rates.
    • ITC rules to be amended to bring greater clarity of determination of ITC and reversal for real estate projects.

With these announcements, the government has tried to address key concerns of the sector. The GST rate reduction on under-construction properties is expected to uplift the sentiments of home buyers. On the flip side, the move may hit profit margins of developers due to a withdrawal of ITC and non-reduction of GST rate on cement (28 percent) leading to increase in the cost of construction which may be passed on to home-buyers.

Further, putting a restriction on the availability of ITC is against the fundamental principle of GST, i.e. seamless flow of credit. A slightly higher rate with the facility of ITC could be a better option.

Also, concerns have been raised that the new tax rates would not apply to work carried out by the developer for old housing societies and Slum Rehabilitation Authority (SRA), which would continue to be taxed at 12 percent and 18 percent, even after 1 April 2019, which may adversely impact the interests of weaker and middle-income groups.

The reduction in GST rates, along with direct tax incentives proposed for the real estate sector in the Union Budget (such as extension of deductions from income to developers of affordable housing projects by one year and extension of the period of exemption from levy of tax on notional rent on unsold inventories from one year to two years), shows the government’s commitment towards its agenda of promoting affordable housing and giving a fillip to the real estate sector.



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