Input credit withdrawal to hurt builders, consumers

The panel's suggestion to slash the Goods and Services Tax (GST) rate and withdraw the input tax credit (ITC) for properties under construction could prove counterproductive for builders, consumers and may encourage evasion, say industry experts.

A tax consultant, who spoke off the record, told DNA Money that if the recommendation of the Group of Ministers (GoM) was accepted then the real estate builders would lose out ITC on raw materials such as cement and steel, which currently attract GST rate of 28% and 18%, respectively.

"In the real estate sector, steel and cement constitute a major chunk of the input used by it. Both of which come under higher GST rate brackets (28% and 18%). Now, if the real estate builder is not able to get the credit on these two inputs it is getting today, he will be worse off and would increase the price for his customer," he said.

The government is currently levying 12% GST on properties under construction and 8% on affordable housing. This is hurting the sector and has led to a big drop in sales of under construction apartments and houses. Many property builders have been lobbying for rationalisation of GST rate.

In the GST Council meeting held last month, a panel was formed to take a decision on the issue. The GoM has come up with the suggestion of slashing the GST rate on unbuilt properties from 12% to 5% and on affordable housing from 8% to 3%.

The GST Council, which is expected to meet next on February 20, will now consider the recommendation of the panel and approve it.

Niranjan Hiranandani, senior vice-president, Associated Chambers of Commerce and Industry of India (Assocham), said any impact due to the proposed GST rate cut would be "absorbed by real developers.

"What we have seen over the past few months is that home buyers are reluctant to pay the GST levied on under construction projects. Given this scenario, the recommendation makes sense – it will result in the burden being reduced where the home buyer is concerned. It leaves the real estate developer with only one option to absorb the impact that removal of ITC will bring about," industry lobby body spokesperson told DNA Money.

Hiranandani said it could be possible for builders to absorb the GST cut impact, as there were many factors that went into the costing and financial viability of a real estate project.

"Costing for each project is defined on a different basis, similarly, calculation of ITC was a challenge with different experts suggesting different ways of calculating the same. The overall financial viability of a project depends upon many factors, ITC is but one of the various factors that impact the ultimate price-point vis-à-vis the project's financial viability," he explained.

The tax expert, who spoke anonymously, said the withdrawal of ITC could encourage the development of a parallel or informal economy, which had shrunk post the introduction of GST.

According to him, if the builders do to not claim ITC then the incentive to buy building material from a registered firm or the formal sector would decline. This would make it difficult for the government to track their purchase and easy for the builder to evade tax or deal in black money.

"In my sense, for the government also it (panel's suggestion) is not very good because the absence of input credit will mean that they (government) will lose the tracking mechanism of builders' transactions. Although, it has been specified that 80% of the material should be sourced from registered buyers, how on earth will they (government) monitor them in the absence of the ITC?" he said.

M S Mani, partner, Deloitte India, also felt that denial of ITC could make builders "disinclined to purchase from registered dealers".

"While the intention in reducing the GST on real estate would be to benefit the industry, the denial of input tax credits could lead to difficulties for the sector as the working capital requirements would shoot up. Despite the requirement of making 80% purchases from registered dealers, the builders would be disinclined to purchase from registered dealers as the incentive of input tax credits would no longer exist," he told DNA Money.

Hiranandani differed in his view on this, saying, "I don't think so. The real estate developer buys from someone, who would have paid GST – the trail already exists. In the new environment, hiding purchases is extremely difficult, if not impossible".

The Assocham chief said GST was "evolving" and based on the requirement of an industry "necessary changes" could be made in the future.

"GST is a tax reform which is evolving in response to how the economy reacts to it. We have seen various changes being implemented, and when it came to GST levied on under construction and not on ready possession homes, it was suggested that GST on under construction units should be reduced, which it appears will happen. How it impacts real estate and whether any rethink needs to be done from a pan-industry perspective is something that we should see in the near future – and I am confident that necessary changes will be made in the future," he said.

GROUND REALITY

• 5% – likely cut in GST on under construction properties
   
• 3% – GST rate on affordable housing seen from 8% now
   
• 28% – GST rate on cement