26 SEPTEMBER, 2019

The revised Goods and Services Tax (GST) rates for residential real estate in India were introduced in the 33rd GST Council meeting in February 2019. On 19th March 2019, the GST council approved the transition plan for implementation of new tax structure. According to this announcement, new GST rates came in to effect from 1st April 2019. The revised GST rate proposed are as follows,

Type of Property

Old GST Rates

New GST Rates

Affordable housing units

8% (With ITC)

1% (No ITC)

Non affordable housing units

12% (With ITC)

5% (No ITC)

(ITC: Input Tax Credit)

The new rate of 5% (1% for affordable housing) will apply to those residential properties whose construction is going on even after 31st March 2019 or any new projects launched after 1st April 2019.

Now, builders have the freedom to choose either old tax rates (with ITC) or new tax rates of 5% and 1% (without ITC) on under-construction houses. The GST rate cut is expected to benefit home buyers belonging to the middle-income category and economically weaker sections of the society.

The GST rate cut is intended to help the home buyers taking advantage of Credit Linked Subsidy Scheme (CLSS) of the Pradhan Mantri Awas Yojana (PMAY). According to India Rating and Research (Ind-Ra), the reduced GST rates for housing units will simplify the entire process for home-buyers.

Here are the ways in which the GST rate cut will benefit the housing sector in India:

More Transparent Tax Structure

The GST rate cut may not decrease the prices of properties for potential buyers. According to the newly formed structure of GST, real-estate developers are no longer entitled to claim an input tax credit (ITC). Moreover, they are obliged to buy 80% of inputs and related services from registered dealers.

The previous system had also  provided the builders with a right to claim ITC for the tax they paid when purchasing different material required for construction, such as steel, cement, paints, electrical items, etc..

Moreover, the claims of residential unit developers in transferring the benefits of any ITC to end-buyers were unclear. Hence, the home-buyers were unclear about the vague structure of the tax. However, ITC is no longer part of GST. Thus, Ind-Ra believes that understanding tax-payments will be easier for home buyers now.

Accordingly, the transactions would be clearer for the buyers to understand.
The simplified structure of the tax will lead to considerably good compliance from builders. The reduction of GST on affordable housing units will justify the pricing structure of properties for home buyers.

Increased demand for housing units

Ready-to-move-in residential properties are excluded from the ambit of GST rules as they were not measured as a supply of a good or service.
On the other hand, GST is levied only on under-construction properties. But now, the price gap is created between the value of under-construction houses and ready-to-move-in houses, especially in the affordable segment. This change is anticipated to boost the demand for under-construction affordable housing projects, especially in developing cities.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.