GST Council Clears Transition Plan For Tax Cut For Real Estate Sector

The Goods and Service Tax Council approved the transition plan to move towards new tax rates for the real estate sector by giving builder an option to levy the old tax rate if they want.

Choosing the old tax rates for projects, construction for which was started before March 31, will help builders to avail their accumulated input tax credit. New projects starting from April 1 will have the new tax rates of 1 percent for affordable housing projects, and 5 percent for other housing projects without the benefit of input tax credit.

Giving two options to builders will address the problem of inventory, Revenue Secretary Ajay Bhushan Pandey told reporters, adding that developers can choose the rate that is beneficial in clearing the inventory,

Shishir Baijal, chairman and managing director at property consultant Knight Frank, said developers with healthy sales are likely to continue with the earlier regime to maintain their profitability. Consumers, however, will expect developers to charge lower GST rates in line with the new tax regime, which might affect margins, he said. For projects with slow sales, according to Baijal, developers may change course as the stimulation of demand will far outweigh the adverse impact of input-tax credit withdrawal on margins.

West Bengal Finance Minister Amit Mitra had written to Union Finance Minister Arun Jaitley, also the chair of GST Council, to give options to builders to have new or old rate for under-construction properties and impose new rates for new projects post April 1.

“The pragmatic move to segregate under-construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit,” MS Mani, tax partner at Deloitte India said. “The protection of existing input tax credits and mandating the new rates only in respect of new projects would benefit both builders and consumers.”

This will also help builders to price the loss of input tax credits in the new projects, he said.

Builders who opt for new GST rates for under-construction properties will have to proportionately reverse credit for inputs that they would have availed, Pandey said.

The formula for reversing the credit has been derived from calculations using percentage of construction completed, invoices issued, ratio of commercial to residential housing, among others.

Opting new GST rates for under-construction properties may create problems for builders. “Reversal of input tax credit on a proportionate basis would entail significant computational issues for builders as each project would be in various stages of construction and have differing pre- and post-completion sale patterns,” Mani said.

However, Abhishek Jain, an indirect tax partner at EY India, said that the approval of the move by GST Council is a relief for the real estate sector in handling transition issues.

Agreed Rohit Poddar, joint secretary, Naredco West, and managing director at Poddar Housing and Development. While the new GST rates for ongoing under-construction properties may hit the margins, the power to choose between old and new rates will be favorable for the developers and buyers both, he said. “Overall the decision is in the favour of ongoing under-construction properties and stable growth will be visible in the sector.”

For a project with both commercial and residential spaces, developers will be allowed to claim input tax credit for ongoing projects, proportional to carpet area of the commercial space to the total carpet area of the project. GST on commercial realty is levied at 12 percent with the facility to avail input tax. The GST Council did not reduce tax rates for commercial properties.