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Affordable housing gets GST lift

Infrastructure status and lower GST rate prompt realtors to rush into this segment

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A year ago, India's real estate industry was hit by the twin effects of demonetisation and the rollout of the Goods and Services Tax (GST) a few months later. This came at a time when the sector was already reeling under the after-effects of the global economic slowdown.

During the first couple of months of the GST regime, the realty market took time to understand the new taxation system which involved the input tax credit component that slowed down the business and threw the unorganised and unregistered players off the trading ring. "For the developers, certain procurement of raw materials were happening from this 'unorganised and unregistered players'. With the new taxation system, these developers were forced to either tie up with new vendors or coerce the existing ones to come under the GST net," said an industry insider.

However, since the last one year, the only opportunity the realtors are able to cash in on is through 'affordable housing' projects. It is this segment within the housing industry that is doing reasonably well and developers are realigning their strategies to venture into the affordable housing segment.

But, all of a sudden why is the realignment happening? Because the government has provided certain sops not just under the Pradhan Mantri Awas Yojana (PMAY) or 'Housing for All', but also through tax rationalisation for affordable housing projects. For example, GST on affordable housing is 8% and 12% for the rest of the under construction residential projects.

In some states, a homebuyer has to shell out other state taxes like stamp duty and registration, thereby taking the total tax outgo to as high as 20% inspite of a 12% GST.

Earlier, GST on all kind of housing transactions was 12%, which was then brought down by 4% for affordable housing under GST, thus making a section of builder lobby unhappy, especially those with a large pile of 'mid-segment and luxury' inventory.

Another discontent within the sector has been the non-availability of land abatement in the year-old tax regime. "Since land abatement is insufficient, prices will remain either constant or rise as the input tax credit is less than the GST slab. The market being sluggish, hence the market forces will decide whether the increased costs should be passed on to the customer periodically or not," said a realty consultant.

This led to homebuyers approaching the National Anti-Profiteering Authority towards increasing property rates in several of the projects. However, the real estate sector remained indifferent to this aspect citing either land abatement related issues, higher GST of 12% and complicated tax structure, forcing them not to pass on the input tax credit benefits to the customers.

On the other hand, the lobby kept demanding various benefits right from reduction in GST rate to 6% (even lesser than affordable housing GST rate of 8%), lower interest rate for home loans, abolition of stamp duty, infrastructure status to the entire housing sector so that the builders can avail finance with ease and at a lesser rate. However, the prevailing macroeconomic situation forced the government not to heed to their demands. Only the affordable housing segment was provided with 'infrastructure status'.

Resultant, the 'luxury era' for realtors is bygone, for now, and prompted them to change their business strategy. Developers like Sunteck Realty, Peninsula Land, Puravankara, Wadhwa Group, among many others ventured into the affordable housing segment.

In fact, even private equity funds have started focusing on this segment. For example, Mahindra Lifespace Developers has partnered with HDFC Capital Affordable Real Estate Fund-1, while Brick Eagle Capital Advisory received Rs 100 crore anchor commitment for its Alternative Investment Fund, and Kohlberg Kravis Roberts has invested $31 million across the affordable housing projects.

This interest by the private equity firms in the affordable housing space is set to increase further due to government's push for 'Housing for All'.

According to a recent Colliers International India report, recovery in sales is primarily driven by affordable housing, while mid-range and luxury housing is likely to remain lull. The increase in absorption of affordable housing projects is due to change in government policies such as infrastructure status to the segment, establishment of Affordable Housing Fund and reduced GST to 8% from 12%.

However, during the last one year of GST implementation, the problems pertaining to the taxation system aren't over.

Shishir Baijal, chairman & managing director, Knight Frank India, said, "Considering that we have spent just a year in this new regime and the teething problems are being addressed on a regular basis, we are optimistic about the potential of this reform, which will eventually have a transformatory impact on the country's property market."

According to Baijal, "On the ground, the impact of cost benefit varies across markets and product categories. Within the housing segment, house buyers, particularly in the low-to-mid income housing segment, have witnessed a cost reduction on account of both the benefits of input tax credit and a lower tax rate of 8%. The premium housing market has witnessed a moderate pressure due to unabsorbed input tax credit."

Other issues faced by the industry include the land abatement rate of 33% (as the earlier land abatement available was 70%) that needs to be increased for Tier I cities where the cost of land is extremely high. Furthermore, transfer of rights and joint development agreements were not subject to service tax before. They are in the nature of the immovable property. Hence, they should not be subjected to GST," said Jaxay Shah, president, Credai National.

Developers continue to share that it is challenging to ascertain input tax credit for certain costs like the raw material inputs. According to them, the challenge lies in estimating the cost of these commodities over the entire life cycle of the project. Since the purchase of these supplies is linked to construction progress it is difficult for developers to estimate upfront the costs and input tax credit received for the same.

As the projects still continue to be under the transition phase from the earlier Value Added Tax to GST, the migration continues to be a complex process and explaining the same to the homebuyers has been all the more challenging.

Similarly, for the National Real Estate Development Council, 'One Nation, One Tax' still hasn't provided them with a level playing field and they are waiting that the policy makers pay heed to their charter of demands.

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