A generous cut

Vinod Behl

Notwithstanding the fears being expressed about the possible negative impact of discontinuance of Input Credit Tax (ITC) by way of price rise, the substantial cut in GST on under-construction homes  — from 12 to 5 per cent for standard homes and 8 to 1 per cent for affordable homes is set to benefit buyers as well as developers and may very well brighten the prospects of investment in capital- starved real estate sector.

ITC cut justified 

There is a rationale behind the scrapping of  ITC. Firstly, there was lack of clarity in calculating it, considering the variety of goods and services that form part of real estate projects. There were also complaints that builders were not passing on the benefits of ITC to customers and cases, too, had been filed against some builders under the anti-profiteering clause.

On the other hand, there is now the direct benefit of  substantial GST cut for home buyers, which will substantially bring down the transaction cost. This will boost demand, which will, in turn, spur sales. Together with this, the GST cut on under-construction homes has done away with the disadvantage which they had vis a vis ready-to-move-in homes that had 0 per cent GST liability.  

Redefining affordable housing

Moreover, the revised definition of affordable housing — units costing within 45 lakh with carpet area of up to 60 mts in metros and 90 mts in non- etros — too, will make more units eligible for the 1 per cent GST rate. This will particularly benefit affordable and mid- segment homes.

According to Pradeep Aggarwal, Chairman, National Council on Affordable Housing, Assocham, “The maximum shortage of about (70 per cent) is in affordable homes segment. And it is this very segment that will now have the double advantage of low GST and maximum  interest subsidy of up to 6 per cent or 2.67 lakh. The  GST of 1 per cent on under-construction affordable homes is as good as 0 per cent on  ready homes with OC Moreover, with under-construction homes having better terms/plans for payment, there will be a pick up in investment by end-users and investors”. Zulquer Nain, GM Projects, REPL, adds, “The GST cut should be seen in tune with tax exemption in budget  for  annual income up to Rs 5 lakh. With this boost in disposable income, we should see a large number of first time buyers and end-users coming forward to invest in homes”. Ankur Dhawan, CIO, Prop Tiger is also positive about rise in investments as benefit to buyers will be not just in terms of GST cut but also by way of  the tax regime becoming simpler.

Nipun Gaba, Senior VP, Fairwealth Group, believes that fence sitters will expedite their home purchase decision in view of sharp decline in transaction cost in the backdrop of returns in real estate looking more lucrative and investment in realty expected to have an upper hand over investment in other financial assets. Anuj Puri, Chairman of Anarock says that by enlarging the scope of affordable housing through revised norms of cost and carpet area, more premier budget properties will fall  in the affordable category, benefiting buyers in areas like MMR where property prices are high, in turn giving a boost to investment in  affordable housing, though the impact on premium housing may not be as pronounced. 

Immediate impact 

Naredco President Niranjan Hiranandani, who looks at GST cut as one providing impetus to affordable housing, however, believes that since GST cut comes into force from April, buyers may still adopt the wait-and-watch mode. 

However, the lowered tax reduces the differential pricing for under-construction and completed properties and may prompt changes in consumer behaviour in terms of timing their purchases. This augurs well for retail housing finance volumes and asset quality performance of developer loans in metros.

According to Naresh Sheth, Partner, N.A Shah Associates LLP , “The tax rate of cement/ ready concrete mix remains unchanged at 28 per cent. The rationalisation of tax rate on cement would have benefited home buyers more”.

Price debate

Amit Modi, VP Credai, Western UP, says that  denial of ITC will eventually offset the costs added in final price of the house. He calls for rationalising high GST rates on construction materials to keep prices under check.

However, developers  reeling under heavy debt and facing slowdown in sales can not afford to increase prices as they need sale revenue to keep them going.

After severe cut in bank funding and some clamp down on costly NBFC and PE funding, they are more  dependent on customer advances. They also need money to complete their  stalled projects.