Major implications of the GST rate cut on under-construction houses and affordable housing

Major implications of the GST

The GST Council on Sunday has finally come out with the decision that was long awaited by the real estate industry and prospective home buyers. It had, on last Wednesday, deferred the decision to consider a reduction in tax on under-construction houses to Sunday, 24th February.

The Council announced its decision to slash the GST rate on houses under construction from 12% to 5%, while reducing the rate from 8% to 1% on affordable housing. This is expected to contend with the needs of home buyers and augment the sale of residential property. In this regard, the rate cut by the GST Council has brought much relief to the sector that have been seeing sluggish demand in residential property in the past 2 years, the announcement thus harbouring expectations of observing accelerated growth in the industry in the forthcoming period. This move is also likely to give an impetus to the housing finance sector, provided adequate steps are taken up to cope with the supply as well as the cost of liquidity of HFCs.

The reduced GST of  1% for affordable housing strongly upholds the government’s objective of ‘Housing for All by 2022’, while observing a revision of the definition of such homes. The council has presently expanded the scope of affordable housing to those costing up to Rs 45 lakh and measuring 60 sq metre in metros and 90 sq metre in non-metro cities. This is a major push to the housing sector as aspiring home buyers now have a wider range of options to choose from. Additionally, developers would be enthused enough to commit towards offering more residential options in the affordable category.

Meanwhile, the fact that under-construction properties, that had previously attracted a rate of 18% resulting in an effective rate of 12% after factoring one-third abatement for the value of land, would now have a reduced rate of 5% without input tax credit bodes well for the homebuyers. The previous process of passing on the input tax credit suffered from lack of clarity, leading home buyers to postpone their purchases seeking a less complex practice. A reduced GST rate on property would propel these buyers to quicken their purchase decisions, thereby leading the residential market to pick up pace in the under-construction segment and liquidate the bulk of cumulative unsold inventory. It is to be noted that ready properties that have received occupancy certificate do not attract GST.

Thus, the major takeaway from this announcement has been the palpable expectation that the industry would now be able to move forward with relative alacrity. The pending case of lack of clarity in GST has been sorted out to a large extent, and the apprehensions of both demand and supply side have been taken into consideration while arriving at the decision.

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