Cover Story
No Respite For Real Estate
Home buyers are yet to get the promised tax benefits as construction
activity falls to a record low, says M Rajendran
S
hopping for a house has
always been tough –
whether under the old or
the new levy system. Even
before the announcement of goods
and services tax (GST) on 1 July
2017, real estate developers began
coercing home buyers to pay the
full cost upfront instead of making
monthly repayments to evade the
new tax burdens.
Part of the reason is that GST
on the real estate sector has seen
a whopping 7.5 per cent increase,
up from 4.5 per cent to 12 per cent.
On account of this, developers
had sought to advance payment
schedules before the GST rollout,
which is illegal under law. The
finance ministry had to step in to
prevent higher tax on installments.
Second, there is a lack of
transparency over provisions
like input tax credit. This tax is
charged on real estate developers
for purchasing housing materials
such as steel, cement, among others.
While this was introduced to reduce
tax liability on the developers at the
time of property sale, home buyer’s
tax burden was also expected to
come down. For instance, houses
with carpet size of more than 60 sqm
should get a four per cent tax rebate
– down from 12 per cent to eight per
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Photo: Outlook Archive
cent. In practice, this provision is yet
to be fully implemented.
The new service tax was
supposed to bring transparency
in the real estate sector, simplify
home purchase procedures and
bring down the overall purchase
costs. With lack of clarity on the
new levies, real estate developers
either stalled or slowed construction
activities. New home launches saw a
massive decline of 83 per cent in the
first quarter of GST’s announcement.
The number of new homes fell from
24,900 units in the July-September
period of 2016-17 to 4,313 units
during the same period last year.
“The initial few months
were disruptive not only for the
industry, but also for consumers
and government authorities. It is
expected in any game-changer of this
magnitude,” according to Surendra
Hiranandani, Chief Managing
Director, House of Hiranandani.
According to realestate data
analytics company PropEquity, the
demand for housing has plummeted
by 35 per cent from 34,809 units in
Outlook Money July 2018 www.outlookmoney.com
Confusion over
input tax credit
persists
the July-September quarter of 2016 to
22,699 units during the same period last
year. This data was collected from eight
metro cities such as Mumbai, Noida,
Gurugram, Bengaluru, Kolkata, Pune,
Hyderabad and Chennai.
“Even after a year, the only real
clarity that exists for property buyers is
on the prevailing 12 per cent GST rate
on under-construction projects,” says
Anuj Puri, Chairman, Anarock Property
Consultants. He points out that the
confusion persists over the amount
of rebate a prospective homebuyer is
entitled to as part of input tax credit
incentives. “The confusion is not only
about the percentage of input tax credit,
but also on the mode and tranche of the
rebate,” says Puri. Multiple calculations
have to be done for input tax credit.
Customers will get benefit only in the
final tranches of payment, developers
say. The increase in overall down
payment for a house has upset plans
for home buyers. “I had to drop plans
to buy a house following such cost
escalations,” says Tushar Pradhan, a
Delhi-based entrepreneur.
The new levy on the sector has
certainly eliminated the tax-on-tax
system. Because of the ineffective anti-
profiteering provisions, consumers have
not been able to draw benefits. The
consumers stand to benefit only if the
base property prices are reduced and
the developers pass on tax credits to
their customers. At present, consumers
can avail benefits only on those projects
which are nearing completion or has
completed construction post-GST. “So
far, it has not resulted in significant
reduction in prices. For most projects,
the benefit may not exceed five per cent
of the overall construction cost,” says
Hiranandani.
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