A drastic 700 basis points’ reduction in Goods and Services Tax levied on under-construction affordable-housing projects from 8% to 1% (effective rate after deducting one-third towards land cost), and from 12% to 5% for other under-construction housing projects (effective rate after deducting one-third for land cost) is a mixed bag for real estate developers.
While it will marginally increase end-user demand over the near-term, the withdrawal of input tax credit (ITC) announced would impact the profitability of developers. There were concerns on ITC not being passed on by developers. Also, exact computation of tax credit was a challenge as real estate projects have long gestation periods, often spanning 4-5 years. Until now, this made it difficult for developers to gauge the extent of ITC for buyers as calculations also differ for projects launched before and after GST implementation.
The GST Council adopted a new definition of affordable housing, which is now described as a residential house / flat with a carpet area of up to 90 square metres in non-metropolitan cities/towns, and 60 square metres in a metro, and having value up to Rs 45 lakh. Metros identified are Bengaluru, Chennai, Delhi NCR (limited to New Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon and Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region). It should be noted that almost 40-45% of ongoing supply in these six cities fall below the Rs 45 lakh ticket size and so the effective 1% GST rate should stoke demand.
Residential capital values have remained under pressure in recent times, with developers extending freebies and upfront discounts to push sales. Despite the implementation of the Real Estate (Regulation and Development) Act, 2016, or RERA, across most states, and increasing launches of low-ticket units, end-users have sat on the fence. The pressure on small developers is likely to increase because of the unsold inventory and limited funding options. With emphasis on volume growth, pricing pressure is likely to continue.
Though sales may see a marginal uptick (for projects nearing completion), with overall transaction values dipping, developer margins are unlikely to see any improvement as construction costs would rise because of the withdrawal of ITC and as prices remain under pressure. In terms of liquidity, developers will be in a relatively better position, with sales picking up at a gradual pace.
Says Rahul Prithiani, Director, CRISIL Research, “Over the past two years, preference for completed projects has been clearly visible because of the additional GST burden and execution risks associated with under-construction properties. With the RERA framework evolving and GST reduced, end-user confidence towards under-construction properties will improve. This should also gradually improve volume growth and liquidity of cash-starved developers. Overall, the announcement would be neutral for developers.”
The net benefit in terms of ITC determines the actual tax implication for home buyers. In many cases, renowned developers have passed on 3-5% benefit through price reductions. Also, due to adverse demand in most micro-markets, a few developers have fully absorbed the GST impact in the form of discounts. Developers will have to recalibrate project pricing after the notification and those not passing on the benefit will have to bring it down by around 7%. On the other hand, realtors that were passing on the benefit will have to hike prices by 2-4% to maintain margins-which seems difficult in current market scenario. Though the GST framework considered the land share at one-third of the cost, projects in city limits have land cost at 40-50% of total cost. Therefore, the withdrawal of ITC will pinch developers in the affordable-housing segment the most, as the share of construction cost is high there.