GST reduction on housing: cheers & tears

The 33rd GST Council Meeting, on February 24, announced slashing of Goods and Services Tax (GST) for all the under construction houses / apartments to 5% (from the present 12%) and 1% on affordable housing (presently 8%).

Many stakeholders - real estate builders, traders in construction materials, end use buyers of residential properties and many confederations of real estate developers associations - who had strongly lobbied for reduction in the GST rates – are rejoicing. They have the psychological satisfaction that the central government / GST council have yielded to their long-standing demand of reduction in GST on under construction projects of both affordable / normal housing. Even Prospective buyers are also celebrating. The euphoria has settled down. The devil is in its details.

The reduction in the GST to 5% and 1% has been bestowed with several ‘riders’.

Firstly, the benefit of availment of Input Tax Credit (ITC) on critical inputs / materials that go into construction of houses / flats such as iron and steel, cement, paints has been withdrawn under both the categories- affordable and normal housing. This will have serious ramifications and cascading effect on the ‘pricing front’.

Affordable housing redefined

Secondly, the definition of affordable housing itself has been expanded and redefined. Apartments costing Rs 45 lakh and less - both under metros - Bengaluru, Chennai, Hyderabad, Mumbai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon and Faridabad), and Kolkata - and non metros come under the ambit of affordable housing. The eligibility criteria is further tightened with a ‘capping’ on the ‘carpet area’.

A residential house / flat with a carpet area of up to 90 sq metres (968.76 sq feet) in non metropolitan cities / towns and 60 sq metres (645.84 sq feet) in metropolitan cities costing upto Rs 45 lakh come under the category of affordable housing.

This is presently 120 sq metres (1292 sq feet) for MIG1 and 150 sq metres (1,614 sq feet) from 110 sq metres for MIG2 category, under the Prime Minister Awaz Yojana (PMAY) and Cash Linked Subsidy Schemes (CLSS).

This carpet area criteria will now undergo a drastic reduction in sync with the new definition of affordable housing or will not be eligible for the direct subsidy transfer of Rs 2.35 lakh to housing loan borrowers from banks /Housing Finance Companies (HFCs) under this scheme.

In fact, the GST cut to 1% under affordable housing, though apparently looks substantial and 5% under normal housing with the tightened eligibility criteria is not a boon. It is a sweet coated “pill”. A close assessment of the implications of this policy change, made in haste, raises many issues which vitiate the entire dynamics of housing/ real estate industry.

Cement is under 28% GST (sin tax? !). Other critical intermediate goods / construction materials like iron and steel, paints are at 18%. Withdrawing ITC benefit to the builders will destroy the GST value chain and vitiate the very essence and architecture of GST.

The builders will now procure the above materials from non-GST registered vendors and suppliers, which will result in the ugly resurfacing of the ‘black money’ era, leakage in GST revenue stream.

The very purpose of bringing real estate sector under the GST is defeated with the withdrawal of ITC benefit. This will lead to ‘passing’ on the taxes to the purchasers of the houses / apartments. The incidence of taxation will be on the builders but the burden will be shifted to the buyers.

This will result in the price escalation of apartments/houses to the extent of 6-12%, thereby offsetting the reduction in GST on housing which will further breach Rs 45 lakh price capping to be eligible under the affordable housing category.

April 1,2019 being effective date of implementation of the revised guidelines will create huge ‘transition’ issues. Prospective buyers will defer purchases to post-April. The huge inventory of unsold stock of apartments which has already peaked to one million pan-India will further aggravate.

Unsold inventory

There will be no buyers for under construction apartments even under the affordable housing with 1% GST as there is already a surplus supply of “ready to occupy” apartments, with occupation certificate (OC), which do not attract GST. So, why buy apartments in under construction projects, by paying GST, with all the associated uncertainties and loan interest servicing till the completion and handover of the apartments.

This will lead to lack of demand in the housing finance and seriously impact lending by the banks / HFCs during February and March 2019, which is very critical being the end of the financial year.

Twilight zone cases of GST of 8% and 12% already paid by purchasers of apartments in under construction projects, will have huge contentious issues. Customers will now demand for refund of additional GST paid, though the revised GST rates are with effect from April 1, 2019. There will be litigations, consumer forums becoming ‘more active’, mounting complaints with RERA and cancellations of apartment bookings.

Builders who are half way through in construction of huge residential projects in the ‘earlier’ affordable segment of sub Rs 65 lakh catering to the MIG1 and MIG2 categories under the PMAY / CLSS will get ‘snuffed out’ as they cannot, at this juncture, recalibrate and downsize their projects to less than Rs 45 lakh to suit the revised carpet area restrictions of 90 sq metres and 60 sq metres. This will affect builders cash flows, their loans becoming NPAs and affect the supply of housing stock too.It would be appropriate that the GST Council in its next special meeting on March 10, 2019 revisits these critical aspects, reduces the GST on cement, iron and steel, paints, etc., accords refund of ITC to ensure that the builders will not go out of the GST orbit / value chain.

Otherwise, the frenzied pace at which the GST rates are slashed and withdrawing the ITC benefit will only lead to suspicion as to whether the Council/governments are indirectly favouring / succumbing to the builders’ lobby to help them to get back to their earlier ‘best practices’ of dealing in cash, generating black money and political funding.

(The writer is a Bengaluru-based banker)