How buying a house affects your career
When the interim budget of 2019 was announced it was assumed to be a wait and watch the situation on the review of ‘GST impact on homebuyers’. One of the many concerns that required attention in the budget was- rationalisation of GST in case of under-construction properties and affordable homes.
However keeping in mind the challenges faced in the residential market, the GST council on Sunday declared cut down in tax rates for under-construction and affordable homes which will be effective from April 1, 2019.
The reason behind the slashed tax rates is to give a boost to the real estate sector which is struggling with record inventories as well as to give relief to the middle class, neo-middle class and the aspirational middle-class.
Currently, the GST is levied at 12% with an input tax credit (ITC) on payments made for 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% after considering one-third abatement on account of land cost.
According to Jaitley, the consumers felt that the benefits of ITC were not being passed on to them by the builders, and hence a GoM was set up to suggest changes in taxation on real estate.
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, which was also restricting the money flow in the realty market.
GST on under-construction flats
The reduction in the GST on under-construction apartments is the most decisive move that will stimulate demand and sales. This move will give the necessary push to the demand in under -construction segment, which has been suffering from low sales levels for the last many quarters.
The elimination of ITC may hit profitability for the supply side, however, the potential demand generation because of this move will outweigh any negative aspect leading to more sales numbers and revenues. It can be inferred that the reduction in GST has the potential of reducing buyers payout by 6% - 7% on the overall purchase, depending on the category.
With regard to those properties where construction work has already begun, a committee of officers will draft the transition rules and frame guidelines. The fitment committee and law committee by March 10 will draft those guidelines and immediately place before the GST Council.
GST on affordable housing
The government is focused on its agenda of pushing affordable homes, which is visible in the decision to reduce GST to a mere 1% for this segment from 8%. Henceforth, the lower tax burden on home buyers is expected to push demand in the segment which, in turn, will keep developers committed to building more affordable homes.
The criteria required for an affordable house to have a 1% GST rate implication:
1.) They need to meet different carpet area requirements.
2.) The houses with a carpet area of 60 square meters in metros and 90 square meters in non-metros which fall under the Rs. 45 lakh are qualified, thereby redefining ‘affordable house’
These initiatives have been taken in order to meet ‘housing for all’ by 2022.
The council has adopted twin definition of affordable housing on the basis of carpet area and cost so that an aspiring home buyer can buy slightly bigger (house), to be very precise a 60 sq metre carpet area in metros and 90 sq metre outside the metros which approximately translates to a 2-bedroom house in metro and a possibly 3-bedroom house in non-metros.
Hence, to ensure that the real estate sector does not become a cash-driven sector on account of the removal of ITC, the builders will have to purchase a "very high percentage" (which will be decided by a committee later) from GST registered dealers.
Thus, the reduction in GST rates with an expanded definition of affordable housing, coupled with incentives proposed in the budget and the reduction in lending rates by the RBI, will upgrade the game of residential properties in the realty sector. However, the much-awaited reduction in GST has prompted homebuyers to defer their decision for the last two months as it is supposed to be applicable from April.