Great expectations

After every meeting of the GST Council, taxpayers have come to expect three types of announcements — those that are made because they have been in the air for some days prior to the meeting, those that take one completely by surprise and those that are expected eagerly but are never made.

The decision taken at the 33rd meeting of the GST Council to reduce the rates of tax on certain categories of real estate transactions falls in the first category, the decision taken in an earlier meeting to leave the GST threshold limits to States fall in the second category and the decision not to remove Cement from the 28 per cent bracket can be slotted in the third category.

From April 1, 2019, houses/flats with a carpet area of 90 sqm/60sqm in metropolitan/non-metropolitan cities and costing less than ₹45 lakh would be classified as affordable housing projects and would be taxed at 1 per cent. All other residential properties under construction would be taxed at 5 per cent.

Irrespective of the category, input tax credit cannot be claimed. Intermediate tax on development right, such as TDR, JDA, lease (premium), FSI shall be exempted only for such residential property on which GST is payable. The Press Note that announced the decisions taken lists out the following as the advantages for the sector — the buyer of house gets a fair price and affordable housing attracts only 1 per cent GST, interests of the buyer/consumer gets protected; ITC benefits not being passed to them shall become a non-issue, cash flow problem for the sector is addressed by exemption of GST on development rights, long term lease (premium), FSI etc, unutilised ITC, which used to become cost at the end of the project gets removed and should lead to better pricing and the tax structure and tax compliance becomes simpler for builders.

The real estate industry would be relieved that GST would not be charged on long-term lease premium, development rights etc. The GST Council’s decision could probably close many cases pending before the AAR.

Despite these benefits, major players in the real estate industry would be disappointed on losing out on input tax credit. Real estate projects involve significant inputs of goods, services and capital goods all of which would incur GST. If the artificial restriction on claiming input tax credit for works contract is removed and an accurate output-input costing and set off is done, one should not be surprised if the effective tax rate is below 5 per cent.

The GST Council should provide an option to real estate players to either charge 12 per cent and claim input tax credit or charge 5 per cent sans the credit. It is possible that denial of credit could lead some to opt for cash payments since there is no incentive to keep the transaction in the GST regime. Players in the affordable housing segment may not have such worries due to the negligible rate of tax.

Lawmakers should reconsider their tendency to focus on the carpet area of the house. To the common man, affordable housing depends on the price point at which the house is offered and he would be well aware that the carpet area of the house would also be as per the price. The industry should be left to decide the carpet area at different price points.

In the build-up to the elections, the government is keen on giving out something for everyone with an expectation that everyone gives them something back during voting time. The million-dollar question is in doing so, are they forgetting the basic formula of GST? (All output-all input= GST liability)

The writer is a chartered accountant

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