GST on completed properties without completion certificate, to hit real estate sector

The Finance Ministry recently clarified that GST will not be applicable on real estate properties that have obtained the completion certificate at the time of sale. We examine how this will impact various segments and stakeholders in the sector

The applicability of the Goods and Services Tax (GST) in the Indian taxation system, was a move aimed towards ‘one nation, one tax’. After land abetment, the applicable GST for under-construction properties was 12 per cent, while ready-to-move-in flats were kept out of the ambit of GST. Even for under-construction properties, there was a ruling to provide input tax credit (ITC) pass-over to the buyer, to ensure that it becomes a tax-neutral proposition.

While the tax calculations and ITC pass-over still remain a challenge after 1.5 years of the GST regime, a recent announcement stated that GST will not be applicable only on ready-to-move-in flats, where the sales take place after the issue of the completion certificate. This is likely to add to the woes of buyers, as well as developers.


GST on under-construction properties: Impact on buyers

Until now, all properties that were treated as ready-to-move-in, were out of the GST’s ambit. So, buyers had significant choices. As per ANAROCK data, more than 90,000 units out of the total unsold inventory of 6.87 lakh units (as of Q3 2018) across the top seven cities, were ready-to-move-in – a massive 14 per cent of the overall unsold stock. However, after this announcement, projects that are ready-to-move-in but do not have completion certificates, will attract GST. For buyers, this means that either their purchase cost will increase, if they decide to purchase such a property, or the overall spread of options will reduce. After all, not all unsold ready-to-move-in properties may possess a completion certificate.

See also: GST not applicable on sale of flats after issue of completion certificate: Finance Ministry


GST on properties without completion certificate: Impact on developers

Developers were already struggling with huge unsold inventory and were leaving no stone unturned, to make sales and generate cash flows. They were also cashing-in on the buyers’ preference for ready-to-move-in units, since these were not liable for GST. However, the sudden NBFC crisis jolted the sector and fund-raising became a major concern.

Now, with the announcement on GST, developers are left with no choice but to absorb the GST charges in ready-to-move projects that have not been given completion certificates. If they attempt to pass this additional burden on to their buyers, their ready-to-move-in units that do not have completion certificates will be at par with under-construction projects, in terms of the cost to buyers.


GST exemption on properties with completion certificate to boost resale property market

However, this announcement may be a blessing in disguise for the secondary market. The secondary real estate segment does not attract GST, as such properties are, by definition, complete. Buyers eyeing ready-to-move-in units will now certainly evaluate this option, rather than paying 12 per cent GST on first purchase units.


GST on ready-to-move properties without completion certificates: Impact on unsold inventory

The burden of unsold inventory in the primary market is likely to increase, as more home buyers may now consider buying resale units, which are exempt from GST. The additional GST levy on ready-to-move-in units without completion certificates is an extra cost, which developers simply cannot afford to pass on to their customers. Given their existing woes, with respect to unsold inventory, developers have little choice but to absorb this additional cost, either partially or completely, if they want to keep sales going.


Other impacts

Another obvious trend that will emerge is that ready-to-move-in projects with completion certificates will draw significant demand. Developers with such stock will not miss the opportunity to cash in on it. We will also see developers putting in greater efforts to obtain completion certificates, so that they can declare their projects as free of GST. This would be a notable change from the past, when developers with ready-to-move-in units were in no real hurry to obtain completion certificates. Affordable housing will also see a massive boost, because such projects attract only eight per cent GST, as compared to the other segments which attract 12 per cent. Affordable housing will become the strongest segment, in the rapidly-changing regulatory regime.

(The writer is chairman, ANAROCK Property Consultants)


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