Ashok Kumar, 36, assistant manager with a Gurgaon-based multinational company, was among the happy lot of homebuyers, when the Goods and Service Tax (GST) Council announced the reduction in GST rates last month on under-construction houses. About six months ago, Kumar bought an under-construction apartment in Gurgaon that came under the Haryana government’s affordable housing scheme for ₹21 lakh. He has paid about ₹10 lakh so far, along with GST at the rate of 8%. After the GST Council slashed the rate on affordable housing projects to 1% from the earlier 8%, Kumar was hoping to save ₹77,000 on the remaining ₹11 lakh that he has to pay to the developer.

His happiness, however, could be short-lived as the GST Council, which met on 19 March, decided to give developers a choice in how to levy GST on properties already under construction, and that could mean no savings for Kumar.

In the case of regular housing, the developers can either opt for the existing GST rate of 12% with input tax credit (ITC) or the new rate of 5% without ITC that was announced on 24 February. For affordable housing projects, developers can either go for the existing GST rate of 8% with ITC or the new rate of 1% without ITC. The new lower GST rates and the choice for the developers come into effect from 1 April 2019.

Keep in mind that developers can choose between the old and new rates for existing under-construction projects only. Any new under-construction project that is launched after 1 April will have to adhere to new GST rates.

Here is why the GST Council gave a choice to developers on levying GST on existing under-construction properties and how it will impact homebuyers.

The rationale

GST is applicable only on under-construction projects. According to the 24 February announcement by the GST Council, lower rates came without ITC. ITC helps a business reduce the GST amount it has paid on inputs or raw material from the amount of GST it has to deposit on the output. This reduction in GST expense is passed on to the homebuyers.

Since developers would have already passed on the benefits of ITC to buyers of existing under-construction properties, the new GST rate would impact their cost and profitability. Developers are, therefore, happy with the latest announcement that offers them choice. “It is beneficial for developers who had already worked out the sale price after factoring in the input credits of the project and had already passed on the benefits to the customers. The confusion is now clear,” said Ashok Gupta, chief managing director, Ajnara India Ltd, a real estate developer based in National Capital Region or NCR.

This means that most developers will stick to existing GST rates for under-construction projects to avoid any loss. “For older projects, developer will go for older rates and hence the fear of losses is gone,” said Vikas Bhasin, managing director, Saya Homes.

However, for new projects that get launched after April, there is no choice and the developers will have to levy the new rate. For buyers, this will mean a change in pricing of real estate projects.

According to a report by Kotak Institutional Equities, “The revision in headline GST rates will likely help lower real estate prices in high-realization markets such as Mumbai and Delhi, while being less beneficial for players in Bangalore.”

Developers will now have to hurry to communicate the reduction in the price to the buyers. “Now, the developers have to work towards undertaking the changes in the system (IT, documentation and processes) to meet the deadline of 1 April. They have to take the decision at the earliest regarding the new projects as customers would be expecting a reduction in prices. Also, the basis of revised pricing has to be communicated to them,” said Pradeep Aggrawal, co-founder and chairman, Signature Global, a real estate developer, and chairman of National Council on Affordable Housing, Assocham.

Existing homebuyers

While giving choice to builders has brought relief to them, it is a setback for existing buyers in under-construction projects who were cheering the reduction in GST rate. Had it been made mandatory for developers to charge the lower GST rate even in existing under-construction projects, homebuyers would have paid GST at the rate of 5% instead of 12% on remaining instalments amount in case of normal housing projects and 1% instead of 8% in case of affordable housing projects.

It is unlikely that developers will charge the lower GST rate on remaining instalments. “The choice of selecting the GST regime would depend on the respective project dynamics. The ones with healthy sales traction are likely to continue with the earlier regime to maintain their profitability,” said Shishir Baijal, chairman and managing director, Knight Frank India, a real estate consultant firm.

However, developers who want to clear off their existing inventory may take the bait and levy a lower GST to attract buyers. “For projects with slower sales velocity, the developers may change course as the stimulation of demand will far outweigh the adverse impact of ITC withdrawal on developer margins,” said Shishir.

Many experts believe that the choice to choose the tax rate may lead to confusion and tax evasion. “The option to choose between 12% with ITC versus reduced rates without ITC will confuse customers. Customers will prefer reduced rates whereas developers might prefer higher rates with ITC. We can expect many more disputes and cases coming to the anti-profiteering authority in the coming days,” said Ankur Dhawan, chief investment officer, PropTiger, a Gurgaon-based real estate consultant firm.

Though buyers in existing projects may not get the benefit of lower GST rates, potential buyers who are looking to buy an apartment may get the benefit if they book an apartment in a project that is launched after 1 April.

 

Source : Mint