The GST Council today announced the decision to address the transition issues on ITC for under construction projects while also providing the developers the options to choose between the old and the new GST schemes. The Council had in its last meeting on February 24, slashed tax rates for under-construction flats in affordable category to 1 per cent. GST rate on other categories was reduced to 5 per cent, effective April 1, 2019.
GST council made it flexible for developers to choose between old GST v/s New GST schemes: Dr. Niranjan Hiranandani, National President, NAREDCO
The GST council addresses the transition issues on Input Tax credit for the ongoing projects with making it flexible for the developers to choose between the old GST v/s New GST schemes. This will allow the developers to opt between two GST schemes available i.e old GST rate with ITC or apply a reduced rate of GST without ITC for the under-construction projects in order to avoid operational hassles. Real Estate Developers who choose the new GST rates will have to proportionately reverse their input credit. The GST Council has also mentioned that real estate developers will need to purchase 80 percent of goods and services from GST-registered vendors even without input tax credit benefit. He further added that the developers can choose to have old and new GST rates for different buildings in the same project. The new rate, applicable wef. 01 April 2019 is 5 percent without tax credit or for Affordable Housing, 1 percent without the input tax credit. All new buildings and projects where work begins from April 1 will have to adhere to these new rates. The reduced rate of GST will surely enhance the customer’s confidence and develop a positive scenario to further garner momentum in sales.
Reducing taxes at this point could have been interpreted as a move to woo voters: Anuj Puri, ANAROCK Property Consultants
The new GST-related announcement has given real estate developers the choice to either opt for the old rates and the accompanying input tax credit (ITC) benefits, or else to adhere to the new reduced GST rate of 5% without ITC. While not exactly ground-breaking, it is indeed an intelligent move by smart play by the incumbent Government. With this decision, it has carefully side-stepped conflict with both builders and buyers.
Most developers reacted to last month’s announcement of the new GST rate minus ITC with trepidation. There was justifiable worry about what would happen to the input stock which they have accumulated much before as part of their long-term purchases. For them, this new move will be beneficial. However, developers choosing to go with the second option of new GST rates may not be able to hike property prices in the immediate future. The possibility of prices being hiked was a matter of concern for aspiring buyers, but the fact is that developers can ill afford to test the currently fragile market sentiment by raising rates immediately.
As for the buyers, today’s announcement will not really impact them much because they will continue to expect lower GST rates. Today’s announcement is probably no more or less than what could be expected from the Government. The Election Commission’s model code of conduct is in force, and reducing taxes at this point could have been interpreted as a move to woo voters.
Sales velocity and project dynamics to dictate the choice of GST regime for on-going projects: Shishir Baijal, Chairman & Managing Director, Knight Frank
Today’s announcement of giving developers a choice of tax regime for ongoing projects has brought some reprieve to developers’ concern on the loss of Input Tax Credit (ITC) in the new regime. The choice of selecting the GST regime would depend on the respective project dynamics. The ones with healthy sales traction are likely to continue with the earlier regime to maintain their profitability. The consumers nonetheless will expect developers to charge lower GST rates in line with the new tax regime, which might affect margins. However, for projects with slower sales velocity, the developers may change course as the stimulation of demand will far outweigh the adverse impact of ITC withdrawal on developer margins.
A relief to developers: Rohit Poddar, Poddar Housing and Development and Joint Secretary, NAREDCO West
The decisions taken by the authorities have given relief to the developers as the option to go with the older GST structure is still available. While the new GST rates for ongoing under-construction properties may hit the margins for developers, the power to choose between old and new rates will be favorable for the developers and buyers both. Overall the decision is in the favor of ongoing under construction properties and stable growth will be visible in the sector.
Previous announcement by the Council on GST were buyer centric: Parth Mehta, Paradigm Realty.
The previous announcement by the Council on GST was directed to be a buyer centric move as the affordable housing rates were without ITC. Since the developers are already facing various headwinds resulting in shrinking margins and poor cashflow the decision to avail ITC in ongoing under construction on proportionate basis will certainly serve as some breather for developer. Lowering GST on houses was a good move but abolishing ITC without lowering GST on input cost was detrimental for developers as it would hit their margins drastically as well as affect cash flows. Since the council has made it mandatory only for new projects to carry revised GST rates of 5% without ITC and 1% for affordable , this will result in developers pricing the new launches at higher rate to protect the margins which will shrink if rates are maintained because of abolishment of ITC and higher GST for input materials.