A lot of people are hoping for a populist budget from finance minister Arun Jaitley next week. And after its recently concluded meeting on January 18, the Goods and Services Tax (GST) council have given a section of home buyers something to cheer about.
As per the recommendations of the council, for the housing sector, there will be less incidence of GST for homes purchased under the Credit Linked Subsidy Scheme (CLSS). For under-construction homes that form a part of CLSS will now be charged GST at 8 percent instead of 12 percent, a cut of 4 percent. However, people who are not eligible for CLSS will continue to pay higher GST.
The concessional rate of GST of 12 percent (effective rate of 8 percent after deducting one-third of the amount charged for the house towards the cost of land) will henceforth (from January 25) be applicable for houses constructed or acquired under the CLSS for Economically Weaker Sections (EWS) / Lower Income Group (LIG) / Middle Income Group-1 (MlG-1) / Middle Income Group-2 (MlG-2) under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY Urban).
Under CLSS, the interest subsidy would be provided on home loans taken by eligible urban poor (EWS/LIG/ MIG-I/ MIGII) for acquisition or construction of house.
Real estate is still not a part of the GST framework. However, real estate here refers to the value of the land and not the construction activities (or the works contract) in the building of a house. GST is applicable on the construction cost incurred by the builder and not on the houses already constructed, which only amounts to selling of the building.
This makes under-construction projects costlier than a ready-to-move-in home. As per the Central Board of Excise and Customs (CBEC), “Sale of building is an activity or consideration which is neither a supply of goods nor a supply of services.” This makes the ready-to-move properties lucrative compared with under-construction properties.
So far, houses acquired under CLSS attracted an effective GST rate of 18 percent (effective GST rate of 12 percent after deducting value of land). The concessional rate of 12 percent was applicable only on houses constructed under the other three components of the Housing for All (Urban) Mission/Pradhan Mantri AwasYojana (Urban), namely (i) Redevelopment of existing slums using land as a resource component; (ii) Affordable housing in partnership with other entities and (iii) Beneficiary-led individual house construction / enhancement.
The exemption has now been extended for houses acquired under the CLSS component as well. Therefore, the buyers would be entitled to interest subsidy under the scheme as well to a lower concessional rate of GST of 8 percent (effective rate after deducting value of land).
The GST council in its statement states: “It may be recalled that all inputs used in and capital goods deployed for construction of houses attract GST of 18% or 28%. As against this, most of the housing projects in the affordable segment in the country would now attract GST of 8% (after deducting value of land).”
“As a result, the builder or developer will not be required to pay GST on the construction service of flats etc. in cash but would have enough ITC (input tax credits) in his books to pay the output GST, in which case, he should not recover any GST payable on the flats from the buyers. He can recover GST from the buyers of flats only if he recalibrates the cost of the flat after factoring in the full ITC available in the GST regime and reduces the ex-GST price of flats,” the note added.
Simply put, by lowering the GST, it is expected that builders will be incentivised enough not to dodge the system and effectively lower the tax incidence on the buyer.