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|10 February, 2019

Indian realty sector awaits GST rate cut

Reduction to 3% and 5% in affordable and in other categories to be a big boon to buyers

Image used for illustrative purpose. Mumbai's skyline is seen April 9, 2008. With one of Asia's largest slums, congested streets and sometimes startling whiffs of human waste, Mumbai may not be everyone's first choice for a world-class financial centre.

Image used for illustrative purpose. Mumbai's skyline is seen April 9, 2008. With one of Asia's largest slums, congested streets and sometimes startling whiffs of human waste, Mumbai may not be everyone's first choice for a world-class financial centre.

REUTERS/Punit Paranjpe

Non-resident Indian property investors and buyers stand to benefit significantly from an impending tax cut that has been proposed by a panel in a bid to give the much-needed fillip to the lackluster Indian real estate sector.

The possible Good and Services Tax (GST) rate cut to 3 per cent and 5 per cent (from 8 and 12 per cent) in affordable and in other categories, respectively, will not only be a big boon to property buyers from within and outside of India but also trigger the rebound of the $120-$130 billion real estate industry currently languishing in the doldrums, realty pundits said.

They said the beleaguered real estate sector, of late caught in a web of new reforms, would be better-positioned to brave the challenges once the NRI segment is incentivised to return to the market through the GST cut proposed for all under-construction residential properties.

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The tax cut, recommended by the Group of Ministers (GoM), will definitely attract more NRIs to the real estate sector that is expected to touch $1 trillion by 2030, resulting in an overall positive impact on the Indian real estate market, said analysts.

Realty experts believe the GST cut would lead to reduction of home prices by as much as Rs300,000 for super built-up area of 1,000 sqft However, others believe the net benefit will depend on the percentage of input taxes forgone under the proposed regime.

"For NRIs, it will be a major boon because they largely invest in under-construction properties as they buy it more for investment purpose and not largely for their end-use. Thus, a flat 5 per cent rate of GST on under-construction homes without the ITC would provide an indubitable and transparent benefit to NRI buyers as well," said Shajai Jacob, CEO for the GCC at Anarock Property Consultants.

"The tax cut will be a big stimulus for the industry and will prompt a revival of interest among NRI investors and home buyers, who have been getting less and less enthusiastic because of the flagging fortune of the property market," said Oommen Iype, managing director of Anne's Tortilla Mexican Food.

"For NRIs, the stimulus move is certainly positive, offering a major incentive to take a relook at the property market, which has been grappling with slow demand in the wake of GST introduction and demonetisation. The proposed tax cut appears to augur a bounce back for the industry by rekindling demand from overseas investors," said Shahul Hameed, managing director of Thani Technical Enterprise.

"The reported recommendation from GoM to reduce GST rates to 3 per cent and 5 per cent respectively in affordable and in other categories, will breathe a new life in to the sector. The existing GST regime has been a major deterrent for sales in under-construction projects," said Shishir Baijal, chairman and managing directorof Knight Frank India.

The seven-member GoM, headed by Gujarat's deputy chief minister Nitin Patel, will finalise its recommendations within days and then submit its recommendations to the GST Council, which will take the final decision on the proposal.

Currently, GST is levied at 12 per cent with input tax credit (ITC) on payments made for under construction property or ready to move in flats where the completion certificate has not been issued at the time of sale.

The effective pre-GST tax incidence on such housing property was 15-18 per cent. GST, however, is not levied on buyers of real estate properties for which completion certificate has been issued at the time of sale. There have been complaints that builders are not passing on the ITC benefit to consumers by way of reduction in price of the property after the rollout of the GST, tax experts explained.

"The ongoing 12 per cent GST rate levied on under construction properties proved to be a major deterrent for several homebuyers, particularly NRIs since it was seen as an extra burden of nearly 6-8 per cent on their pockets. Dissatisfied with this added burden on their pockets and thereby on their overall returns, they postponed their buying decisions. While back in India, most buyers preferred ready-to-move-in properties [with completion certificates] that were exempt from this tax," said Jacob.

Analysts said 2019 seems to be opportunistic for affordable and mid-income housing segment along with investments opportunities from NRI buyers at large. There has been an upsurge in ready to move in units owing to Rera and GST benefits. Under construction projects are expected to see a massive push too once the GST rates are reconsidered.

The Indian real estate sector is expected to contribute 13 per cent to the country's gross domestic product by 2025. In 2017, the realty sector contributed about 6-7 per cent to India's GDP. The sector is expected to touch $1 trillion by 2030, becoming the third-largest globally.

Apart from its contribution to India's GDP, the growth of this sector holds significance as it is the third largest employer, after agriculture and manufacturing, in the country and presently employs over 50 million people.

 

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