GST Council meet: Realtors get two options to tax under construction house

No input tax credit to lapse, but developers need to do the math

Real estate developers with unsold housing inventories can now choose either the old rate or the new one if the project is still under construction on March 31. This option was given on Tuesday at the Goods and Services Tax Council meeting. 

The decision also cleared the air on possible loss in input-tax credit for projects that are underway if realtors choose the new rate structure. The Council approved a formula, based on four parameters, which will determine the extent to which tax credit can be claimed on purchases for constructions.

The Council also decided to term a project with up to 15 per cent commercial space as a residential property for the purpose of the new rate structure. 

“Developers will get about 15 days to a month to decide on the option, but the exact time would be decided over the next few days in consultation with states. This is precisely to solve the problem of unsold inventory. Realtors can now weigh the option that benefits the market the most,” said Revenue Secretary Ajay Bhushan Pandey on Tuesday. 

The four factors would be: Extent of completion of the project, extent of booking of apartments by buyers in the project, extent of invoicing of purchases for that project, and the proportion of residential space in the project. 

Using the formula, input-tax credit would be reversed or be usable on a proportionate basis, said Pandey. 

If the input-tax credit derived from the formula exceeds what is claimed till March 31, the developer would be eligible to claim the difference. If the derived value is less, the developer would need to reverse a part of the credit. 

No amount of the input-tax credit will lapse if this formula is used, officials said. Experts welcomed the decision, albeit with a rider of uncertainty about cost escalation. 

M S Mani, partner at Deloitte, said: “The pragmatic move to segregate under construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit.” “Providing such option would be beneficial for those developers who had already factored the entire input credits of the project while arriving at the sale price and in many cases these benefits may already have been passed on to customers,” said Pratik Jain, partner, indirect tax, PwC India. Developers would need to do the required math to arrive at the right decision on the option. Many of them welcomed the decision. 

“This is a developer-centric decision, which will help the real estate market. Realtors are likely to retain the old rate structure for projects nearing completion, while opt the new one for projects just begun,” said Parth Mehta of Mumbai-based Paradigm Realty. 

For projects that begin work after April 1, the new rate structure would apply without any relaxation, with a mandate to purchase at least 80 per cent of inputs from registered dealers. 

The new rate structure reduces the rate on affordable housing from 8 per cent with input-tax credit to 1 per cent without input-tax credit, and for other houses from 12 per cent with input-tax credit to 5 per cent without input-tax credit. 

Houses costing less than Rs 45 lakh, with space of 60 square metres in metros and 90 square metres in non-metro locations, would be termed affordable, the Council decided in a meeting in February. 

“Buyers would expect overall reduction in prices and may want to understand the basis of revised pricing. Industry would need to be cautious of anti-profiteering provisions and do a detailed analysis for the ongoing projects,” PwC’s Jain added. 

Builders would need to calculate and assess both the options on a project by project basis to decide what suits better. A single developer building multiple projects has been allowed to avail different rate structures for different projects. 

For those under construction project owners who opt the old rate structure, the input-tax credit can be set off against tax liability in the normal sense.