GST Rate Cut – Panacea or Brief Pain Relief for Real Estate?
The recent interim budget announced fresh sops for the Indian real estate sector—which, on closer scrutiny, did not really send clear revival signals to the market at all. Now, the strident demand for lowering goods and services tax (GST) rates on under-construction properties is on the table.
 
In fact, the prime minister and finance minister have proactively assured that they are considering this collective demand from the industry positively. Will a GST cut infuse enough positive sentiment to help the languishing real estate sector revive?
 
Perhaps, rather than debating whether a GST cut will do the trick, we should ask ourselves whether it would actually solve the ‘real’ problems the sector is facing.
 
The general expectation is that a few sops here and there will bring in the much-needed respite, when they actually only give a momentary infusion of notional positive sentiment. They can be likened to doses of painkiller to a suffering patient—while they quell the symptom of pain for a while, they do nothing to cure the underlying cause of the pain.
 
For the real estate sector, the fundamental causes of its pain are:
 
  • A massive number of under-construction housing projects are heavily delayed or chronically stuck;
  • The basic cost of homes is still far too high for the largest segment of the population;
  • The prevailing credit squeeze on developers remains unaddressed;
  • The Real Estate (Regulation and Development) Act, 2016 (RERA) is not a national force but more of a regional one.
 
A GST rate cut does nothing to solve these problems. It could be argued that the marginally increased sales would ease developers' funding issues. However, a small boost in sales will not put a serious dent in their existing debt or solve their funding issues. It would be symptomatic relief, at best.
 
The Cost of a Home - before and after a New GST Rate
 
Let us examine the actual benefits that a buyer gets after and before a GST rate cut. For an under-construction apartment sized 1,000 sq ft and price-tagged at Rs5,000/sq ft, a buyer currently pays about Rs4.2 lakh as GST, assuming that the builder has passed on the input tax credit (ITC) benefit of nearly Rs1.8 lakh to the buyer.
 
If the GST rate is slashed to a flat 5% without the ITC benefit, this buyer will have to cough up Rs2.5 lakh as GST. So, he essentially saves Rs1.7 lakh if the GST rate cut happens. However, will a saving of Rs1.7 lakh on a home that costs Rs50 lakh really trigger a surge of home sales big enough to bail it out?
 
No doubt, even a slightest sentiment boost goes a long way in increasing sales by a certain percentage. Nevertheless, we are currently looking at a humungous unsold stock of 673,000 units across the top seven cities, and new units are being added every month. The sector would need some phenomenal triggers to shed this burden.
 
The Bane of a Differential Tax System
 
Even though 2018 witnessed green shoots of revival as far as sales and new launches were concerned, housing sales numbers were largely dominated by ready-to-move-in units, which are exempt from GST. While the 12% GST levy on under-construction properties certainly proved to be a deterrent to buyers, the uncertainty of project completion was a far more serious dampener.
  
Also, more than the high GST rate, it is the differential tax treatment for under-construction and ready-to-move-in properties which has exacerbated the slowdown in the real estate sector. Buyers deferred their purchases until a project obtained the completion certificate so that they would save on GST altogether. This put an additional burden on builders who need to finance their projects to completion, since advance sales were very sluggish.
 
ANAROCK data indicates that out of the total unsold stock 673,000 units in the top seven cities, only 13% are ready-to-move-in (RTM). Out of the remaining 588,000 unsold under-construction units, 20% are slated to be completed by 2019. If they do get completed as per this schedule, another 116,000 units will be added to the RTM category.
 
Naturally, buyers will continue to prefer RTM units, which are altogether free of GST rather than under-construction homes which do attract this tax. The contest between a lower GST and no GST at all is a no-brainer - apart from the fact that buyers of RTM homes have the benefit of instant gratification, freedom from project completion uncertainty, and savings on rental outgo until the project is completed.
 
Given that the previously significant price gap between RTM and under-construction homes has reduced remarkably, a reduction in GST will not be a panacea to heal the major woes of the housing sector. The differential tax treatment between the two is by itself a sentiment dampener.
 
Need of the Hour: A Bigger Game Plan
 
Rather than a GST rate cut, it is the recent hint at a possibility of uniform taxation of under-construction and RTM homes, which would really help. A GST rate cut would compel a few more fence-sitting buyers to take the plunge, but it will not serve the purpose of making under-construction properties as attractive as RTM properties.
 
Limited advance sales will continue to curtail cash flows for developers who will have to resort to other financing options. Apart from the fact that private equity (PE) is an option only to players with exceptionally strong balance sheets and completion records, PE also comes at higher interest rates.
 
Non-banking finance companies (NBFCs) are in a crisis and banks have curtailed credit to builders, despite instructions from the Reserve Bank of India (RBI) to ease lending norms. This increases the overall costs they incur on their projects, and this cost is being passed on to buyers in one way or the other.
 
The real estate sector may experience a minor, temporary lift on the back of a GST rate cut, and a bigger, longer-lasting lift of the differential tax is done away with altogether and one uniform tax is applied.
 
However, the larger issues of the sector that need to be addressed are:
 
  • Reducing the dependency of builders on external funding sources. Supply trends for 2018 indicate that builders are cautiously trying to bridge the demand-supply gap by launching projects in segments that have maximum demand. This proactiveness should be reciprocated by easing of lending norms.
  • Failed or delayed projects have severely diminished buyers' faith in under-construction properties. This issue must be addressed via measures to ensure that such projects are either completed or their buyers are refunded in full, so that their home buying options open up once again.
  • RERA implementation across all major states cannot remain on paper or on bureaucratic discussion tables.
 
  
(Anuj Puri is Chairman of ANAROCK Property Consultants Pvt Ltd)
 
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COMMENTS

Gurudutt Mundkur

4 weeks ago

Most nuclear families have broken up and children have got their own residences. Naturally, the demand for new accommodation has dropped drastically. Why builders are still indulging in constructing new accommodation is a moot point.
Only a small number would be looking for a second home, or a holiday home, given what the tax-laws are.

Mahesh S Bhatt

4 weeks ago

Can we have industry wise rate cards of official & so called unofficial taxes or service charges? Mahesh Bhatt

Register case against Cognizant for bribing TN officials: Stalin
DMK President M.K. Stalin on Monday demanded the registration of a case against the US-based Cognizant Technology Solutions for bribing Tamil Nadu government officials in an effort to secure construction permits.
 
In a statement issued here, Stalin said that Prime Minister Narendra Modi-led BJP government should assist the state's Directorate of Vigilance and Anti-Corruption (DVAC) in acquiring bribery evidence from US courts.
 
Last week, Cognizant said that it agreed to settle the case by agreeing to pay about $28 million to the US Department of Justice (DOJ) and the Securities Exchange Commission (SEC).
 
Bribing of foreign government officials is an offence in the US under the Foreign Corrupt Practices Act.
 
Cognizant admitted that it had paid about $2 million as bribe to the officials through its construction company to get the permits.
 
The construction company in question is a large engineering firm with an office in Chennai, according to the case papers.
 
Stalin, in his statement on Monday, said the AIADMK government has brought a permanent blot on Tamil Nadu in the global arena by demanding and accepting bribe from Cognizant in 2014 to give construction permits for the KITS Campus in Shollinganallur.
 
Stalin said the AIADMK government was driving away investors thereby preventing job opportunities for the youth.
 
Although Cognizant has agreed to settle the case, the DVAC can start a probe to locate the corrupt officials, an agency official told IANS.
 
"It is not mandatory for DVAC to wait for a formal complaint to start an inquiry. Any credible information is enough to start an initial probe. So, even a newspaper report is information for DVAC. In such a situation, the DVAC Director can call for records, peruse, assess and proceed with future course of action," S.K. Dogra, former DVAC Director, told IANS.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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Setback for Vedanta, SC refuses re-opening of TN copper smelting plant
In a set-back to Vedanta, the Supreme Court on Monday refused to order the re-opening of its Sterlite Copper Smelting plant located in Tamil Nadu as it set-aside the National Green Tribunal's (NGT) December 15 order on the grounds of jurisdiction.
 
Setting aside the NGT order on maintainability, a bench of Justice Rohinton Fali Nariman and Justice Vineet Saran asked Vedanta to approach the High Court and since the Thoothukudi plant has been locked up for quite some time, they could urge the High Court Chief Justice for an expeditious hearing and interim relief. 
 
The plant was shut down permanently on May 28, 2018, when the state government had ordered the Tamil Nadu Pollution Control Board (TNPCB) to seal and "permanently" close the plant in the wake of protests over pollution concerns.
 
The protests had turned violent, resulting in the death of 13 people in police firing on May 22-23 in Tuticorin, officially called the Thoothukudi port city.
 
The top court verdict came on the TNPCB's plea against the December 15, 2018, NGT order directing it to give its consent.
 
The grant of consent by the state pollution control board was subject to the satisfaction of certain conditions by Vedanta. 
 
The TNPCB had in the course of arguments asserted that the copper smelting plant was the cause of near irreversible ground water pollution and thus could not be allowed to resume operation.
 
On the other hand, Vedanta had described as "political" the decision to put the plant under the lock.
 
Vedanta had contended that the high level ground water pollution was not limited just to Thoothukudi alone, and that similar situation existed in other parts of the state.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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