The GST Council on Sunday reduced tax rates on under construction housing and affordable housing. From the standpoint of economic activity a higher incidence of construction, with its linkages to many sectors and capacity to absorb unskilled labour, is a booster shot. In this context the GST Council, which is a federal set-up of finance ministers of states and centre, took a sensible decision. The GST rate for affordable housing has now been lowered from 8% to 1%, and under construction houses from 12% to 5%.
Even if the move should positively influence economic activity, one aspect is worrisome. The GST Council decided to withdraw input tax credit. In other words, we have moved back to the erstwhile indirect tax regime in an important way. Providing input tax credit is meant to fulfil two aims. One, it reduces the distortionary impact of the tax regime in economic decision making. Two, it provides an economic incentive for everyone to pay tax. According to GST Council, builders were earlier unwilling to lower prices even if input tax credit helped lower cost. But the answer to that does not lie in reintroducing a distortionary tax system. The problem vests in other aspects of the opaque real estate ecosystem which hinders competition. These should be addressed.
Lower taxes are certainly beneficial but the architecture of GST also matters in long-term progress. Therefore, GST Council should avoid exceptions from the input tax credit system.
Read full story: GST cut from 12% to 5% on houses under construction
Read full story: GST on houses under construction slashed to 5%; affordable housing to attract 1%