Rationalization of GST Rates – One more step in the direction of Nation Building
Authored by Jayesh Kariya, Chartered Accountant
Real Estate is the second largest and fastest growing sector in India after agriculture. It provides significant employment opportunities apart from supporting more than 250 industries. It is expected contribute about 13 per cent of the country’s GDP by 2025. In the fast few years the sector has been significantly impacted by the recent changes such as demonetization, introduction of GST, RERA, Benami Properties Regulations, financial crisis, changes in taxation laws and more importantly slowdown in the consumer demand.
Despite these odds, the sector is still standing tall with a very minimal NPAs. At the same time, the sector still attracts foreign funding. From US$ 120 billion in 2017, real estate sector in India is expected to reach a market size of US$ 1 trillion by 2030. Private Equity and Venture Capital investments in the sector have reached US$ 4.1 billion between Jan-Nov 2018. Institutional investments in India’s real estate are expected to reach US$ 5.5 billion for 2018, the highest in a decade.
In order fulfill the mission of the Government of India’s “Housing for All by 2022” and to provide much needed boost to the sector, Affordable Housing has been accorded “Infrastructure” status and External Commercial Borrowings (ECB) has also been permitted. Budget 2019 proposals give few bounties to both the consumers and realty developers. But, the GST still remained as a pain point.
GST Council Recommendations:
At present, the GST is levied @ 12 per cent with input tax credit (ITC) on purchase of under-construction property or ready-to-move-in flats where completion certificate is not issued at the time of sale. For affordable housing units, the existing tax rate is 8 percent with ITC. At the same time, various other charges levied by the developers as part of the sale consideration attracts GST of 18%. All these taxes acts as a deterrent for home buyers thereby making the dream home unaffordable.
In order to streamline GST for realty sector, GST Council provided its recommendations on Sunday, which should provide the desired relief. The key highlights of the recommendations of the GST Council are as under:
• GST shall be levied at effective GST rate of 5% without Input Tax Credit (ITC) on residential properties outside affordable segment; and
• GST shall be levied at effective GST of 1% without ITC on affordable housing properties.
The new rates shall become applicable effective from 1 of April, 2019
For this purpose, “affordable housing properties” has been defined as residential house/flat of carpet area of upto 90 sqm in non-metropolitan cities/towns and 60 sqm in metropolitan cities having value uptoRs. 45 lacs (both for metropolitan and non-metropolitan cities). Metropolitan Cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR).
GST exemption on TDR/ JDA, long term lease (premium), FSI:
No GST on arrangement for development under various arrangements for development rights such as TDR, JDA, lease (premium), FSI, etc. provided such residential property on which GST is payable.
Details of the Scheme shall be worked out by an Officers Committee and shall be approved by the GST Council in a meeting to be called specifically for this purpose. Further, the decision of the GST Council would be given effect to through Gazette notifications/ circulars, which shall have force of law from the effective date.
Impact on Realty Sector:
At the outset, this is a very welcome move and will help reduce pain of the home buyers. The details of the final Scheme to be notified by the Government would determine the real impact of these recommendations.
The Scheme will help achieve simplicity and transparency. The flat rates without any ITC would eliminate the skepticism of the consumers about the passing on of ITC benefits by the developers and will end the controversy around anti-profiteering. But, at the same time, non-granting of ITC could increase the overall GST cost for the consumers depending on the nature of the project, land cost, etc.
There is a mixed reaction to these recommendations among the realty developers as regards affordable housing as well as flat rates without ITC. Nonetheless, overall it is a positive booster for the sector as there is a steep reduction in rates of GST across products.
Once these recommendations will become reality in April 2019, coupled with other initiatives and schemes of the Government, the sector should start gearing up for the next phase of growth. The development activities should gain momentum especially in the affordable housing segments in non-metro cities.
The non-availability of ITC would increase the overall cost of the developers and they may not be able to pass on this burden to the consumers given the current state of affair.
The exemption of GST to various arrangements for development rights such as TDR, JDA, lease (premium), FSI, etc. is a major incentive for the cash trapped sector. This will foster the development of residential projects under JDAs and Joint Venture models. This will remove the uncertainty on levy of GST going forward and will reduce the overall cost of development as well as resolve the upfront cash outflow pressure.
Issues remains to be addressed:
The Government should address following aspects/issues while notifying the new Scheme of GST rates rationalization.
• Clarity on applicability of lower rates need to be provided – whether it will be applicable to new projects launched after 1 April 2019 or it will apply to the on-going projects as well – both for new sales as well as balance payments to be received on progressive basis;
• The transition provisions need to be introduced with regard to utilization ITC available with the developers as on 1 April 2019 – whether this will be allowed to be set off even after 1 April 2019 or the same shall lapse;
• How to apply lower GST rates in case of mixed use developments or projects with mid-segment and affordable segment apartments;
• For the purpose of availing the concessional rate of 1 percent, the project should fulfill following conditions:
(a) The carpet area of Residential house/flat should not exceed:
a. 90 sqm in case of non-metropolitan cities/towns; and
b. 60 sqm in case of metropolitan cities
(b) The value of the flat should not exceed Rs. 45 lacs (irrespective of the area where the project is located – i.e. metropolitan or non-metropolitan cities
The second condition would not help the development activities in the affordable housing segment in non-metro cities as well as many of Tier-II cities given the cost of the land and the increased cost of construction. Given this, the Government should relax the condition of value of flat to be Rs. 45 lacs. Further, the Government should also clarify the meaning of the term “value of the flat” to avoid any controversy at a later date e.g. whether it means the total landed cost including charges for all amenities or the basic value of the flat excluding such charges.
• The exemption form GST on development arrangements stated above should also be extended to mixed use projects as well as commercial projects to support the “Make in India”, “Digital India” and Start-up India” initiatives of the Government.
• The lower rate of GST should be extended to commercial projects which are developed on “build to sell” model as it will help IT/ITES sector as well as “start-ups” and emerging entrepreneurs who aspire to acquire small properties to start their business;
• The developer should be given an option to opt for this Scheme of lower rate without ITC or higher rate with ITC especially in respect of the existing projects registered under RERA.
• The Government should streamline the definition of “Affordable Housing” including the the ‘area criteria’ across various regulations such as FDI Regulations, Income-tax Law for tax exemption purpose and GST. Under both the FDI Regulations and Income-tax Law the area criteria is 30 sqmt. in metro cities and 60 spmt. in non-metro cities; whereas under GST it is on higher side. Therefore, in order to provide further boost to the sector, the Government should increase this threshold for FDI Regulations as well as Income-tax Law.
• In the Southern parts of India, the developers enter into two separate agreements, one for sale of land and another for constructed property. In such cases, the Government should clarify that the reduced GST rates should be leviable only on the agreement for constructed property and not on the sale of land.
• The lower GST rates should be prescribed for construction contractors or works contracts providing services to the developers constructing affordable housing projects eligible for 1% GST rate so that it will help to reduce the overall cost of development of affordable housing projects and will help to achieve the objective.
• The exemption form GST on development arrangements stated above should also be extended to agreements/ arrangements entered into prior but the actual activity of development of projects begin on or after 1 April 2019 to avoid malpractices and litigations.
• Provide clarity on wow will the reversal of Input Tax Credit as per Rule 43 of CGST Rules 2017 function and such reversal should be allowed as deductible business expenditure under the Income-tax Act, 1961.
In summary, the recommendations of the GST Council are very welcome and appropriately timed. These measures will provide the required Philippe to the reeling sector and will provide help development of affordable housing stock across the country thereby help achieve the vision of the Government “Housing for All by 2022”. In order make this Scheme of rationalized GST, the Government should consider the aforesaid suggestions while rolling out the final Scheme so as to make it clearer and successful.
I acknowledge the support of my colleagues Mr.Jagat Mehta and Ms.Disha Unadkat.