New GST Rates And Rules – Its Implications On Housing Market


Published on Mar 15, 2019 5:10 am

In the midst of the code of conduct of general elections, the Election Commission has given its approval for holding the GST Council meeting on March 19. The nod from the Election Commission (EC) was required as the model code of conduct has come into force following the announcement of election dates for 2019 Lok Sabha polls by the EC of India. The Goods and Services Tax (GST) Council to be chaired by finance minister Arun Jaitley will finalise the guidelines for new rules and regulations for implementing its decision of lowering the GST rates for the ongoing under-construction residential properties.

Earlier in its last meeting on 24th February, the GST Council had asked the fitment committee and law committee to draft the new rules and rates for the transition of the existing under-construction residential properties and frame guidelines by March 10. With the framing of rules, the developers as well as consumers will get clarity on how much will be the impact of the rate cut on the ongoing residential projects.

In the 33rd GST Council meeting, the GST Council proposed a reduction in the GST rate on under-construction affordable homes to 01 percent without input tax credit (ITC). It also reduced the GST rate on  under-construction residential properties of the normal category to 05  percent without ITC.

The GST is currently levied at 12 per cent (effective) with ITC  for normal category and 08 percent with ITC in the case of affordable housing projects on payments made for under-construction residential properties or ready-to-move-in flats where completion certificate is not issued at the time of sale. 

Home buyers will pay a lower GST as the new rules and rate  come into force from April 01, 2019.

Earlier, the Government has doled out sops in 2019 to boost the housing sector that has gone through a relatively tough period over the last couple of years with the compilation of huge unsold inventory and liquidity crisis. Therefore, the real estate sector, being a large employment generator has been in need of revitalisation.    

The steep reduction in the GST rate is being considered as the panacea for  many of the issues facing the sector. The sector has witnessed many  challenges in the recent past including the issues of the liquidity crisis, a slowdown in sales, and compliance with RERA, etc.

No Input Tax Credit (ITC)

So far, the ITC credit was available to the builders in the case of the under-construction flats. Since the benefit of ITC was not being passed on to home buyers by some builders, the Council decided to withdraw the benefit in its last meeting. Now, builders will not be able to claim the ITC in both cases.   

Therefore, the need for framing the guidelines was felt from the fact that the rate reduction made builders ineligible to avail ITC in the value chain, which would bring back informal cash channels to the realty sector.

Redefinition Of The Affordable Housing

The total  acquisition  cost  of  your  dream  home  may  be  cheaper  from  01 April  as  the  government  has  not  only  slashed  the  GST  rates  on  all  under-construction flats but also widened the definition of the affordable  housing segment.

In its recent policy meeting, the GST Council had decided to redefine the affordable housing segment by expanding its scope. Any house or apartment, with a carpet area of up to  90 sqm in non-metropolitan cities and  60 sqm in case of metros with the value up to Rs 45 lakhs will fall under the affordable housing category. Besides, these apartments will attract only 01 percent GST without the ITC from April 01 onwards. Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai-MMR, and Delhi-NCR (Delhi, Noida, Greater  Noida, Ghaziabad, Gurgaon, Faridabad) will fall under the list of metropolitan cities.

Earlier, the residential units with carpet area up to 30 sq meters in metros and 60 sq meters in non-metro cities were only included in the affordable housing segment.

Tax  Simplification

The decision will also help in simplifying tax structure and compliance for builders. The revised GST rate has not only reduced tax for the home buyers but also have simplified the tax structure as the process of passing on the ITC was a complex issue in the past. Now home buyers need not worry about the input tax credit and anti-profiteering authority. The decision will boost the demand for under-construction residential properties as it lowers the tax burden on home buyers.

The Liquidity Crisis

Lower money flow in the realty sector was also a big concern that led to the lowering of the GST rates. Therefore, the rate cut will provide a much-needed impetus to the real estate market that is facing a severe liquidity crisis. The reduced GST rates on affordable housing may improve liquidity as the move will lead to a significant rise in housing sales.
In fact, cash-strapped builders have been hoping for such kind of push in their sales volumes to help them in alleviating their liquidity issues to an extent.

Besides, the Council also has to decide on the issues of GST exemption on the transferable development rights (TDR), long-term lease (premium) and the sale or transfer of Floor Space Index (FSI). This move is expected to solve the cash flow problem for the sector.

Under-construction Housing Prices?

The real estate sector needed to be incentivised by creating a more positive environment for the sector given the inventory pileup and the slowdown in the launch of new projects. Going by the new GST rates policy, developers will have a challenging time as they will not be able to claim the ITC. The elimination of input tax credit benefit may hit profitability for the buyers as the property prices may rise due to the increase in the construction cost.

The raw materials used by the real estate sector are cement, steel, tiles, bath fittings, etc. that attract GST  at varying rates with cement taxed at 28% and most of the other  items taxed at 18%. The denial of the ITC could increase the cost of construction which may get added to the basic price of the flat. Some builders may seek to pass on the same in the form of a base price increase provided the same does not violate the anti-profiteering provisions. Therefore, a reduction in GST rate on raw materials like cement, steel, tiles, etc. may help to overcome this problem to a certain extent.

Most developers currently have a considerable number of unsold stock within the under-construction housing segment. The GST rate reduction in this segment will boost sentiments and help in clearing around 6 lakh unsold housing units. As per the ANAROCK data, there are as many as 5.88 lakh under-construction homes lying unsold in the top 7 cities. Of  these, 34%  are  priced  below  INR 40 lakh  alone.

The rise in demand for under-construction housing units as a result of the reduction in GST rate will bring down the unsold inventory. This will accelerate the sales leading to higher sales volumes and consequently greater revenue generation.  

Therefore, it remains to be seen, in view of the oversupply in the market, whether there will be a little price hike by the builders. In fact, hiking prices may result in a squeezing of margins  for developers. Thus, resorting to price hike while clearing unsold inventory may not be a wise option for them. 

Impact On Under-construction Residential Properties

Sales of under-construction housing properties were severely affected as there  was no GST on completed homes. At present, the GST rate of 12 percent (effective) is applicable only on the sale of  under-construction residential units and also on ready-to-move-in apartments where a completion certificate has not been issued at the time of sale. Sale of ready-to-move-in or completed housing unit does not attract GST if it has received a completion certificate. So, it was being seen that there was a distinct preference for completed housing units compared to under-construction units.  The prospective homebuyers preferred to wait for the projects to get completed as there is not GST on ready-to-move apartments having completion certificate.

The lowering of the GST rates would now boost the housing market by stimulating the demand for under-construction apartments as buyers were mostly preferring ready apartments earlier which did not attract any GST.

It has also been witnessed that the sale of under-construction housing units remained slow to post the implementation of GST in July 2017 owing to higher GST rates and lack of clarity with respect to ITC. Therefore, the council reduced the GST rates on under-construction housing segment which witnessed subdued sales due to higher GST rates.

The lower rate of GST of  5 percent on under-construction apartments can now possibly revive this market segment and ease some of the working capital pressures of builders.

Impact On Affordable Housing Segment

The government has remained focused on its agenda of pushing affordable housing segment to achieve its target of Housing For All by 2022. The lowering of GST rate to 01 percent on affordable homes is expected to push demand and thereby attract more developers in this segment. Therefore, the sales for under-construction residential properties within the affordable housing segment is expected to rise to a significant extent.

After the expansion of the scope of the affordable housing up to INR 45 lakh budget for both metro and non-metro locations, more residential properties will qualify for this segment. Therefore, aspiring home buyers will benefit immensely from this move now as they will have a wider and better range of options to choose from.

Sales of housing units within the affordable housing segment is expected to get a major boost following the government’s decision to cut the GST rates for under-construction housing projects. This is a huge relief for both the home buyers and the real estate industry alike.


In the recent Interim budget, the Government provided incentives to the affordable housing segment with a vision of “Housing For All by 2022”. Subsequently, it was followed by an RBI’s decision to reduce repo rate by 25 basis points. There is a big relief to the home buyers with these incentives as it helps to narrow down the demand mismatch gap.

More importantly, this move sets the stage for a stronger revival for the real estate sector that was already showing the signs of recovery since last year. The much-awaited reduction in GST rates on under-construction residential properties, coupled with the critical change in the definition of affordable homes is a positive and welcome step which will further give the necessary fillip to the housing market.

Ajay Verma

Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.

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