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GST on under-construction flats slashed to 5%, affordable housing to 1% with affect from April 2019

The GST Council has reduced the GST rates for under-construction flats and affordable housing to five per cent and one per cent, respectively and also increased the carpet area of flats under affordable housing

To boost demand in the real estate sector, the GST Council, on February 24, 2019, slashed tax rates for under-construction flats to five per cent and affordable homes to one per cent, effective April 1, 2019. Currently, the Goods and Services Tax (GST) is levied at 12 per cent with input tax credit (ITC) on payments made for under-construction property or ready-to-move-in flats, where the completion certificate is not issued at the time of sale. For affordable housing units, the existing tax rate is eight per cent.

Briefing reporters after the 33rd meeting of the GST Council, finance minister Arun Jaitley said the consumers felt that the benefits of ITC were not being passed on to them by the builders and hence, a group of ministers (GoM) was set up to suggest changes in taxation on real estate. The finance minister said that currently GST is levied at 12 per cent on normal residential houses and 8 per cent on affordable homes, after considering one-third abatement on account of land cost. The Council has decided that after removal of ITC, the rates will be 5 per cent for normal housing properties and 1 per cent for affordable housing, he said.

To ensure that the real estate sector does not go back to being cash-driven, on account of removal of the ITC, Jaitley said the builders will have to purchase a ‘very high percentage’ (which will be decided by a committee) of their inputs from GST-registered dealers. The reduction in rates will give a boost to the Housing for All mission and fulfil aspirations of the neo-middle class, he said.

The Council also expanded the definition of affordable housing for the purpose of availing of GST benefits, to those flats costing up to Rs 45 lakhs and measuring 60 sq metres carpet area in metros (Delhi-NCR, Bengaluru, Chennai, Hyderabad, Mumbai-MMR and Kolkata) and 90 sq metres carpet area in non-metros. “We have adopted twin definition of affordable housing, on the basis of carpet area and cost. We have expanded the definition of affordable housing, so that aspiring people can buy slightly bigger (houses), so 60 sq metres carpet area in metros and 90 sq metres outside the metros, which approximate translates to a two-bedroom house in a metro and a possibly three-bedroom house in non-metros. This will come into effect from April 1, 2019,” Jaitley said. For GST applicability on affordable housing, currently there is no valuation threshold and the calculation of carpet area varies from project to project.

With regard to those properties where construction work has already begun, Jaitley said a committee of officers will draft the transition rules and frame guidelines. “The fitment committee and law committee, by March 10, 2019 will draft those guidelines and immediately place before the GST Council, which will meet via video conference so that ministers do not have to travel to Delhi in election period,” he said. To ensure that the real estate sector does not go back to a cash economy and to fix the accountability of back supply chain, a very high percentage of goods will have to be procured from GST-registered dealers, Jaitley added. “For that back chain, a condition will be put that a very high percentage of purchases to avail of this, will have to be from registered dealers. The GoM has proposed 80 per cent. Whether it is 80 per cent or more, the group will reconsider it and present before the Council,” he said, adding this will ensure that the back chain does not go to a cash-based system.

West Bengal finance minister Amit Mitra, however, flagged issues with respect to the provision that a certain percentage of goods have to be procured by a builder from a registered dealer. “The industry is going through bad period, (it) should get stimulated but with these complications, they will be caught in inspector raj, they will be caught in hawala,” Mitra said.

Jaitley further said the officers’ committee will also discuss suggestions of states, with regard to those apartments where there are commercial spaces and shops. The committee will look into whether it should be permitted and if allowed, then, how much percentage. GST is not levied on buyers of real estate properties for which the completion certificate has been issued at the time of sale. “This decision is certainly going to give a good boost to the under-construction apartments, because people were otherwise waiting for them to get completed and that was also stopping the money flow into the real estate sector,” he said.

– Inputs from PTI

Update on February 20, 2019: The GST Council has deferred a decision on tax rates on real estate till February 24, 2019. Briefing reporters after a meeting of the GST Council on February 20, 2019, finance minister Arun Jaitley said that with regard to the Goods and Services Tax (GST) rate on under-construction housing properties, since certain states wanted physical meeting for this agenda, hence, the Council would meet again on February 24 to take a decision.

Update on February 1, 2019: Unfortunately, the Interim Budget 2019 has not reduced GST rates on homes. The interim FM Piyush Goyal shared that the GST council is awaiting recommendations from the council of ministers, to take a final call on the same.

Update on January 10, 2019: No change in GST rates for real estate. Though the industry was hoping for a revision in GST rates for under construction houses, in the January 10, 2019 session of the committee, differences of opinion came about on including real estate under the Goods and Services Tax. So, the council decided to form a seven-member group of ministers to deliberate further.

Update on December 22, 2018: While the real estate sector was hoping for a downward revision or reduction in GST rates for under construction houses, the committee has maintained the status quo on GST rates for the real estate sector. However, industry experts are hoping for a revision in GST rates for under construction houses, in the January 2019 session of the committee.

The GST Bill was approved in the Lok Sabha on March 29, 2017 with four supplementary legislations- The Central GST Bill, 2017; The Integrated GST Bill, 2017; The GST (Compensation to States) Bill, 2017; and The Union Territory GST Bill, 2017.

At the debate preceding the passing of the bills, finance minister Arun Jaitley said the GST, which will usher in a uniform indirect tax regime in the country, will make commodities ‘slightly cheaper.’ “Today, you have tax on tax, you have cascading effect. When all of that is removed, goods will become slightly cheaper,” he said. On why the GST Council has decided on multiple GST rates, Jaitley said one rate would be ‘highly regressive as hawai chappal and BMW cannot be taxed at the same rate.’

Intent of the GST

The GST will subsume central excise, service tax, VAT and other local levies to create a uniform market. GST is expected to boost GDP growth by about 2 per cent and check tax evasion. States will have to pass their State GST or SGST law that will allow them to levy sales tax after levies like VAT are subsumed.

Tax structure under the GST

In the GST Council meeting held on February 24, 2019, the decision was made to cut tax on under construction residential houses to 5 per cent, from 12 per cent. It was also decided to slash the GST rate on affordable housing, to 1 per cent from 8 per cent, as per Finance Minister Arun Jaitley. These changes are applicable from April 1, 2019. As per industry experts, the elimination of input credit tax benefit may hit profitability for the supply side; however, the potential demand generation as a result of this move will outweigh any possible negative aspects, leading to greater sales numbers and revenues.

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