The goods and services tax (GST) Council on Tuesday decided to give an option to real estate developers with unsold housing inventory to opt between the old or the new rate structure, if the project is under construction as on March 31.
The decision also cleared the air on the possible loss in input-tax credit for projects that are underway if the new rate structure is opted. The Council approved a formula based on four parameters which will enable to determine the extent to which ITC could be claimed on purchases done for under construction projects.
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 to be applicable.
“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 faced by realtors, who can now weigh the option that benefits the market the most,” Ajay Bhushan Pandey, revenue secretary told reporters here after the meeting.
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, ITC would be reversed or be usable on a proportionate basis, said Pandey.
If the ITC derived from the formula exceeds the ITC 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 ITC 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, or precisely their accountants, would need to do the required math to arrive at the right decision on the option. Having said that, developers that Business Standard spoke to welcomed the decision.
“This is a developer centric decision which will help the real estate market. Realtors are likely to retain 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 (ITC) to 1 per cent without ITC, and for other houses from 12 per cent with ITC provision to 5 per cent without ITC. Houses costing less than Rs 45 lakh and less than 60 sq m in metros, while less than 90 sq m in non-metros, would be termed affordable, the Council decided in the meeting in February.
Pandey also said that the National Anti-profiteering Authority will take care customers who do not get the benefit of reduced rates.
“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.