In a much-awaited move, the Goods and Services Tax (GST) Council has slashed the levy on under-construction houses to 5% along with a rate of 1% introduced for affordable homes. In either case, builders will not be able to claim the input tax credit (ITC) on inputs such as steel cement and paint. The government claims that builders were swiping in the gains arising therefrom. The new rates will be effective  from April 1

At present, GST is applicable at an effective rate(standard rate minus deductions) of 12 percent on general housing and effective rate(concessional rate minus deductions ) of 8 percent on affordable housing on the purchase of under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale.

The Council decision ahead of the Lok Sabha elections is expected to boost demand for housing in the otherwise suffering sector. The increase sales of under-construction properties along with a simplified tax structure and compliance for builders could be seen as a strategy to fulfill the incumbent government’s vision to provide a roof to everyone before its targeted year 2022.

The move may also be seen as the government’s attempt to keep an eye on a sector driven by huge cash transactions and black money.

How Have the Rates Been Lowered?

The Goods and Services (GST) Council has accepted the proposal to cut the GST rate for general residential housing to 5% and for affordable housing to 1%. It has also decided to let go of input tax credit (ITC). The new rates will be effective from April 1, 2019.

Currently, the GST is levied on the sale of under-construction building/civil structure or ready-to-move-in flats. These flats are those to which the completion certificate has not been issued at the time of sale. In case completion certificate is not issued to a ready-to-move-in or the completed property, GST is not applicable on sale of such properties. GST is levied at an effective rate of 12 percent (standard rate of 18 percent less a deduction of 6 percent as land value) on normal housing and effective rate of 8 percent (concessional rate of 12 percent less a deduction of 4 percent as land value) on affordable housing.

Also, the Council has brought in the dual definition of affordable housing-one on the basis of carpet area and second on the basis of cost. A residential flat with a carpet area of up to 90 square meters in non-metropolitan cities is considered affordable. These apartments have to be up to 60 square meters in metro cities in order to fall in the category of affordable houses. The value of these flats cannot be more than Rs 45 lakh, to be considered as affordable housing. Delhi-NCR, Bangalore, Chennai, Hyderabad, Mumbai-MMR, Kolkata will be considered as metro-cities.

What was the need to lower the GST?

 Though a little disagreement arose between the states and the central government over procedural implications of the proposed rate cut, the two were equally concerned about the slowdown in the sector and demand-supply mismatch that has led to a high inventory of ready-to-move apartments. The majority of members of the Council approved the cut in GST in the real estate sector, as they agreed that the real estate sector needs a boost.

The input tax credit (ITC) was availed to the builders on a number of inputs like cement, steel etc so that the benefit is passed on the ultimate buyer in the form of low prices of the house. It is, however, seen that the builders were not passing on this benefit to the home-buyers. Constructors and developers were including the cost of this input and calculating the tax on the total amount. Only the balance amount after deducting the ITC components was supposed to be taxed. The ITC has therefore been eliminated. This might decrease the profitability of the builders and developers but will boost the demand significantly.

Is this move, beneficial for the long run?

This move comes as a huge boost for the demand for housing from the middle-class consumer, especially in the urban areas. It may be taken as a deliberate step to stimulate demand in the beleaguered real estate sector. Builders and developers are struggling with a huge inventory of unsold ready-to-move-in houses. The cut in GST for low-cost housing of small-sized houses will be a sentiment booster in the short term, despite the problem posed by the unsold inventory in the regular-sized properties.

On the supply side, it is not very pleasant news for the builders and developers as it may eat away a part of their profitability because of the elimination of the input tax credit (ITC), earlier allowed on a list of inputs used in the construction of the building. The increase in sales of otherwise unsold units is estimated to override the resulting decline in developers’ profit margins.

However, this may not be seen as a long-term revival for the sector. The real estate sector now demands a sustainable solution to the problems faced by the industry for a long time now. One of the many issues faced by the sector is the liquidity crisis in the non-banking financial sectors. Until a solution is found even a piece of small positive news may prove to be a sentimental boost. At present this move may only add positively to the balance sheet of the realtors and developers.

How will it impact the NIFTY Realty?

Above chart is the monthly chart of Nifty Realty Index. As seen from the chart the index is consolidating in the range of 215-220 on lower side to 245-250 on upper side since last 4 months.

• 215-220 is very crucial support zone for the index as it is the 61.80% retracement of entire upmove from the levels of 125 to 375. If the index closes below the levels of 215 for couple of days then it can further drift to the levels of 180-185 where 76.40% retracement level is lying.

• 245-250 is very strong resistance zone for the index as it is the 50.00% retracement of entire upmove from the levels of 125 to 375. 245-250 will also act as a strong resistance zone for the index as the index has broken down from the double bottom pattern. If the index strongly closes above the levels of 250 then it can further move to the levels of 275-280.

So at present, it seems from the monthly chart of the index that the index is buy on dips.

Which Realty Stocks to Watch Out For?

The developers who have a good stream of annuity assets plus strong residential business are the ideal plays in the real estate. Real Estate giants who have a large residential play and low debts on the balance sheet are ideal to invest in. The following stocks can be bought on dips for better risk reward.

1. Oberoi Realty
2. Godrej Properties
3. Prestige Estate
4. DLF.

Disclaimer: The recommendations made herein do not constitute an offer to sell or a solicitation to buy any of the securities mentioned. No representations can be made that the recommendations contained herein will be profitable or that they will not result in losses. Readers using the information contained herein are solely responsible for their actions. Information is obtained from sources deemed to be reliable but is not guaranteed as to accuracy and completeness.