Appeal to FM to do away with GST on Affordable Housing & amend the thresholds of Affordable Housing

The Real Estate Sector is the worst affected due to acute recession in the economy. The steps announced in the Budget 2019 & the remedial measures announced thereafter have not provided any respite to the ailing Real Estate Sector. The recent announcements made by the FM on 14 September 2019 may help the cash ridden Developers in the long run but currently can neither boost the demand for homes nor instill confidence amongst the home buyers.

The next meeting of the GST Council is scheduled in Goa on 20th September 2019. The issue of bringing certain much needed changes in GST on ‘ affordable housing’ is likely to be taken up in the meeting of the council to bail out the real estate sector. If the FM temporarily suspends 1% GST on Affordable Housing & amends the thresholds & definition of Affordable Houses, it will turn out to be a Game changer for the Real Estate sector.

As per the existing provisions, the definition of affordable housing for the purpose of availing of GST benefits is available to those flats valued up to Rs 45 lakhs and measuring 60 sq metres carpet area in metros (Delhi-NCR, Bengaluru, Chennai, Hyderabad, Mumbai-MMR and Kolkata) and 90 sq metres carpet area in non-metros. Thus, the Government has adopted twin definition of affordable housing, on the basis of carpet area and cost. As per the area criterion, an affordable house would be a two-bedroom house in a metro and a possibly three-bedroom house in non-metros.

Looking to the overall collections of GST, the share of GST on Affordable Housing (being 1%) is negligible. Moreover, as per the GST scheme for Affordable Housing, 80% of the Building material has to be purchased from registered Dealers. The implication of this mandatory requirement can be explained with the help of a simple example. Suppose the developer sells a house for Rs. 40 lacs. The buyer currently would be required to pay Rs 40000/- @ 1% which goes to the exchequer. But in reality the Government earns much more. Suppose the GP rate is 10%, the labour is 30% of Rs.36 lacs & cost of building material is 70% of Rs. 36 lacs equal to 25.2 Lacs. The GST paid by the Developer on purchase of building material from registered dealers would be 25.2lacs x 18% = 4.54 Lacs. Thus, the Government already benefits by 4.54 lacs in this transaction as under the new provisions the ITC on purchases cannot be set off against the payable GST. Thus by withdrawing the GST & sacrificing Rs. 40,000/-, if the Government is able to boost the sales, it would translate a lot for both the Government revenues & the Developer.

The capping on the basis of carpet area & valuation in metro/ non metro cities is an area which calls for indulgence by the GST council. The valuation of Rs 45 lacs to fall in the category of affordable housing needs an upward revision. It should be increased to 55 lacs, looking to the current market scenario. If this price capping continues, there would be loss of revenue in both Income Tax & Stamp Duty as both the buyer & the builder  would resort to undervaluation to fall in the category of affordable housing by underreporting the consideration &/or carpet area. Thus, the primary requirement is not only to enhance the monetary limit of consideration, as above, but also to enhance the carpet area threshold of Affordable Housing to 75 sq. Mtrs in Metros & 110 sq. Mtrs in non metro cities.

It will not be out of place to mention that if the monetary & carpet area thresholds are increased, the bookings & sales will take a leap. The Liquidity in real estate would translate to higher purchases of building materials & related services. This would in turn translate into better Liquidity in all sectors & larger GST collection because as per the new provisions, minimum 80% of the building material has to be mandatorily procured from GST registered dealers. This would automatically result in higher GST collection as no ITC is admissible for set- off against sale of immovable properties.


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October 2020