No real boost

Giving in to hectic lobbying by real estate developers, the GST Council has make multiple tweaks to Goods and Services Tax for residential property, slashing the effective GST rate for under-construction homes from 12 per cent to a flat 5 per cent and that for affordable homes from 8 to 1 per cent. The definition of what is affordable has been relaxed too with the result that 40-45 per cent of under-construction projects in key cities are now expected to qualify for the 1 per cent GST. The tax cuts seem to be aimed at giving the languishing real estate sector a shot in the arm by lowering sale prices and wooing back reluctant home buyers. But ground realities suggest that they are unlikely to have this effect.

One of the key reasons why realtors clamoured for GST cuts on under-construction projects was that, in the dull market ready-to-occupy homes which carry no GST attracted far more buyers than under-construction homes. According to Anarock Property Consultants, of the unsold stock of 6.73 lakh residential units across the top seven Indian cities, about 87 per cent are under-construction units. But then the absence of GST is only a minor reason for domestic home buyers to prefer ready-to-occupy homes. A far bigger reason is the lack of trust in developers who have a dodgy track record when it comes to keeping their promises or delivering projects on time. With GST rate cuts merely narrowing the price gap between completed and under-construction homes, it is therefore unlikely that buyers will make wholesale shifts to the latter. That GST on residential property will now be levied at a flat rate with developers no longer eligible to claim input tax credit is another bugbear. Many of the inputs to construction such as cement attract high GST of 28 per cent. Therefore, the inability to claim input tax credit can dent the profit margins of developers and cost them dear in the long run. Analyst estimates suggest that while developers who weren’t passing on input credits to buyers will now be able to slash sale prices by 6-7 per cent, those who were doing so may need to take price increases of 1-2 per cent to hold on to their profitability. The expectation that the GST cuts will deliver an across-the-board reduction in home prices to buyers is therefore unrealistic too.

Overall, given the very limited boost likely to the real estate sector, it is a moot point why the GST Council felt the need to extend these concessions in the first place. Allowing sectors such as real estate a special dispensation on input tax credit not only interrupts the chain of GST credits across industry, but also compromises on transparency to the end-consumer. Also disturbing is the fact that the GST Council, far from simplifying the convoluted GST structure by pruning existing rate slabs, is willing to create new ones to accommodate industry interests.