The G(i)ST of housing


The move to cut Goods and Services Tax (GST) rates for under-construction residential projects was cheered by the industry and the home buyers. It is expected to lift the demand for the housing sector and eventually reduce the finance cost for developers who are sitting on a pile of unsold inventory.

But GST Council has taken away the benefit of the input tax credit (ITC), which may give rise to other issues such as a renewed influx of black money and some developers raising property prices, warn experts.


On February 24, GST Council, chaired by the Union finance minister, decided to reduce the tax on under-construction affordable homes to 1% from 8%. It also defined affordable homes as units priced below Rs 45 lakh and smaller than 60 square metres in a metropolitan area and 90 square metres in non-metros.

In the same meeting, the apex body for decision-making on indirect taxes also brought down the tax rate on under-construction property not falling under the ambit of affordable from 12% to 5%.

And after March 31, 2019, the developers will not be able to claim the input tax credit (ITC) for any housing category.

The actual impact of these decisions is yet to be seen.


The removal of ITC benefits may have opened up the doors for black money into real estate, believes Pankaj Kapoor, managing director, Liases Foras. “With ITC missing, the trail of invoices will be unavailable. Moreover, there isn’t a strong and foolproof mechanism to monitor purchases through legitimate or illegitimate means,” said Kapoor.

“It isn’t that since demonetisation, black has completely vanished from the industry. It is still very much a part of the business. However, now, the quantum of black money in circulation may increase,” said another industry player.

But the loopholes arising out of ITC withdrawal may get plugged soon. Shishir Baijal, chairman and managing director of Knight Frank India, believes that in the upcoming GST Council meeting, a proposal may be passed for the developers to procure a minimum of 80-90% of the input materials through GST-registered vendors, which would root out the possibility of black money.

Kapoor, however, insists that the incentive to file invoices for the raw materials has been taken away. Real estate, he said, is a very local subject. Procurement of construction materials, usually, is not done in bulk or from a vendor who is geographically far. Raw materials are sourced from local vendors on a piecemeal basis (on as per need basis), which paves way for black money.


Though the future looks relatively better now, housing sales, to a large extent, depend on the economy’s health.

Sanjay Dutt, chairman, Ficci Real Estate Committee and managing director and chief executive officer of Tata Realty and Infrastructure Ltd, said, “The customers needed this relief. It will help unlock value from under-construction projects, which is critical to restoring confidence in the developers.”

Aashish Agarwal, head of consulting services at Colliers International India concurs. “The decision to lower GST will remove the final barriers for fence-sitters from investing in real estate. It will allow a more balanced sale of inventory between under-construction and ready-to-move-in apartments, providing relief to developers, buyers and lenders. With 1% GST on affordable housing, young buyers and nuclear families in metro cities will be encouraged to deploy savings in real estate, while a wider spectrum of home sales in non-metro cities will now see a significant reduction in cost, thanks to the revised cost and area definition,” said Agarwal.

Niranjan Hiranandani, co-founder and managing director of Hiranandani Group and president of National Real Estate Development Council, believes that the demand-supply gap will narrow in the weeks to come.


Many established developers such as Lodha Group and K Raheja Corp have already warned about their intent to increase property rates from April 1 or later. The withdrawal of ITC will their shrink margins and the increased costs would most likely be passed on to the end users – home buyers.

Explaining the rationale behind it, Om Ahuja, chief operating officer (residential business), K Raheja Corp, said, “The GST rate cut will provide respite to the overall real estate market. However, this will be a momentary infusion of notional positive sentiment. While the under-construction segment will largely benefit from this, with the loss of ITC benefit for developers, prices of the apartments will start looking northwards.”

Only those developers who have deep pockets and can hold on to their inventory or those who do not find it very challenging to sell homes are likely to opt for a price hike. The rest may maintain the current price level to clear their inventory.

Lodha Group is one such realtor which is talking about increasing prices. Its chief sales officer Prashant Bindal said, “The availability of ITC helped the developer to reduce the cost price to some extent. However, now in the absence of ITC, developers across the sector will face an increase in the cost of construction, which will be passed on to the home buyers. The cost of properties is now likely to rise by 5% to 6% once the new GST rates become effective from April 1.”

But Kapoor and Baijal believe that despite the withdrawal of ITC benefits, a majority of the developers may not prefer raising property rates as sentiments in the market continue to be grim.

At a time when inventory levels are high, the recent crisis in the non-banking finance company (NBFC) sector, triggered by IL&FS default, has compounded the problem. Going by the reports from several real estate consultancy firms, only the affordable segment is doing well and sales for other segments remain sluggish. Though there has been some reduction in overall inventory for mid-segment as well as luxury and ultra-luxury segments, this is primarily due to a slowdown in new projects seen in the last couple of years.

In order to deplete the inventory or housing stock, improvement in sales and revenue flows is necessary so that the developers can service debt. Hence raising property prices now may again slow down apartment sales.

“Despite inflation, in the last so many years, prices did not go up. Why do it now?,” asked Kapoor.


“One subject that no one wants to talk about is that finance cost of the developers will reduce due to GST rate cut and subsequent increase in housing sales,” added Kapoor. The industry players are only talking about the pains and not the benefits that they would derive with the recent decision, is what some experts believe.

Residential real estate is a business where traditionally a developer only invests a certain amount to kick-start a project. This includes investment in purchasing land, securing mandatory approvals and laying project foundation. Thereafter, home buyers and investors start contributing through target-based payments. Once 60-70% of the project work is done, the balance receivables are surplus for the developers. The realtor also utilises a part of the profits to re-invest into a new land parcel.

Due to a slump in the market, housing sales took a hit. As a result, real estate firms turned to loans from banks, NBFCs and housing finance companies to keep themselves afloat. If the sales pick up, as anticipated, the need for debt will reduce and the finance cost will go down, which will improve the margins.

So reduced finance cost may compensate for the loss arising out of ITC withdrawal.

A big beneficiary will be affordable housing space as it has now been clearly defined. It will lift sales in this segment across cities. “This will help customers as well as developers, not to mention encourage lenders to allocate or make available more capital for this segment,” said Dutt.


GST overhaul is not the only impetus the real estate industry has seen in the recent months. In its sixth bi-monthly monetary policy review on February 7, Reserve Bank of India reduced repo rate by 25 basis points to 6.25%.

On February 1, in Interim Budget 2019, it was announced that the notional rent of second self-occupied house will be done away with, TDS threshold on rent was increased from Rs 1,80,000 to Rs 2,40,000, rollover of capital gains was increased from one residential home to two for capital gains up to Rs 2 crore (but once in a lifetime) and deduction for affordable housing under 80IB(8) was extended by one more year. The developers will now be given exemption on notional income on unsold inventory for two years. Earlier, the relief was only for one year.

Despite these measures, the industry participants want more relief to come in.

Hiranandani said that the GST rate on cement should be reduced from the current 28%. “It remains among the highest taxed inputs for construction and there will be no ITC. So developers will face a challenging time.”

Similarly, Dutt also expressed the need for reducing the GST on cement from 28% to single-digits as it directly impacts the affordability of houses.

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