Affordable Housing: Will lower GST on affordable homes help revive the segment?

2017 saw a myriad of landmark reforms such as Real Estate Regulatory Act (RERA), Goods and Services Tax (GST), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (INVITs) being introduced by the government to revitalize the real estate sector and address issues such as red tape, lack of transparency, delay in approvals, etc., which have been plaguing the sector for decades. This, in turn, envisaged to redevelop the sector as an engine of country’s growth by causing global players to stand up and take notice. Furthermore, the government has given a strong impetus to affordable housing to achieve its ‘Housing for all’ by 2022. In the past fifteen months, the real sector has witnessed a multitude of initiatives such as infrastructure status to affordable housing segment, credit linked subsidy schemes with Pradhan Mantri Awas Yojana (PMAY) in order to provide the much-needed fillip to the sector, which had largely been ignored by the developer community between 2008 and 2012 despite strong pent-up demand.

These policy initiatives have been further matched by various benefits to the homebuyers of affordable housing such as reduction in interest rate for housing loans, crediting the entire subsidy of a 20-year loan to the loan account of an applicant, allowing withdrawals from the EPFO to the extent of ninety percent, etc. However, high transaction costs have continued to be a major dampener for buyers. Effective taxation on real estate has continued to remain inexplicably high (18 – 23%, GST + Stamp Duty/registration) over the years and has not augured well with the government’s agenda of enhancing affordability in the housing sector. Implementation of GST was widely expected to usher in the much-needed change by subsuming a myriad of charges such as central excise duty, Value Added Tax (VAT), service tax and entry taxes. Furthermore, other benefits such as the reduced logistics costs as well as Input Tax Credits (ITC) were welcomed by the developer community, which has long been struggling with ever rising development costs. However, tax rate and structure eventually selected for the sector did not address this fundamental issue. Resultantly, all industry stakeholders have been urging government to rationalize tax incidence on residential properties.

Responding to these pleas, the government recently announced a concessional GST rate of 8% for the affordable housing segment. The move has been hailed by all industry sections and is expected to give the much-needed boost to the affordable housing market. The move will also encourage developers to effectively lower the tax incidence on the buyers as they will not be required to pay GST on the construction service of flats, but would have enough ITC to pay the output GST, thereby eliminating the need to recover any GST payable by the consumers. Moreover, the reduction in the effective GST rate to 8% from 12% on affordable housing is good news for the entire economy as it will increase employment and consumption at the national level. However, high land prices still remain a major stumbling block in making real estate an affordable commodity in the true sense. Thus, real revival of the low cost housing segment can happen only when land prices witness a correction in the near future. This can happen through continued government support towards enhancing supply of FSI in the affordable segment and also undertaking Public – Private Partnerships (PPP) with developers.

Lack of clear definition of low cost housing is another major hurdle in making affordable housing a viable proposition. With the segment being a low margin product, it becomes almost imperative for the developers to ensure quick product delivery, ideally two and a half to three years, to achieve feasibility. Effective approval system such as single window clearances and standardization of planning rules would go a long way in ensuring that the interest of buyer and developer remains in affordable housing to achieve the ‘Housing for all by 2022’ mission.