Tax On Under-Construction Property Thwarts Housing-For-All Plans
The government's decision to lower the Goods and Services Tax (GST) rate from 12 per cent to eight per cent for projects under Pradhan Mantri Awas Yojana (PMAY) and Credit-Linked-Subsidy Scheme (CLSS) is a welcome move. However, it is going to be applicable only to homes meant for the middle-income group (MIG) and the lower-income group (LIG), and a vast section of homebuyers in the metros and other large cities will remain out of coverage.
The real estate sector, one of the major growth engines for the Indian economy, has undergone radical reforms in the past few quarters, and the subsequent change in business dynamics have impacted the operating environment to a significant extent.
In India, the supply of housing properties is majorly the responsibility of the private sector and given the emerging environment, clearly the supply-side is under tremendous pressure due to myriad reasons.
Developers now, for instance, have much more at stake considering that in the after the implementation of the Real Estate (Regulation & Development) Act, 2016, building a real estate project would be way different than before. At the same time, the channels of raising initial capital are gradually fading out.
The possibilities of raising finance through pre-launch and under-construction projects have shrunk majorly due to changes in the taxation policies.
Today, buying under-construction property attracts 12 per cent GST as against no GST on the completed property. This may discourage property buyers to enter into under-construction projects and therefore, developers may face less inflow of capital from the sale of under-construction properties.
Homebuyers, on the other hand, may have to wait longer for completed projects that will also cost much more than the properties bought during construction stages.
According to the real estate law, the homebuyer must register the property if the payment goes above 10 per cent of the total value. That means a homebuyer has to shell out stamp duty on the full value of the property, which is under construction and may take a long time to complete. This is yet another factor that discourages buyers from buying under-construction properties.
In this case, instead of making the buyer pay full stamp duty payment at one go, an amount proportionate to the payment being made can be charged and the rest of the amount can be charged at the time of possession of the property.
If we combine the GST with stamp duty charges, municipal taxes and other charges, the total tax outflow for a homebuyer comes up to as much as 25 per cent of the property value.
Such a huge burden of taxes on a basic necessity such as housing does not gel with the government's focus on providing housing for all. Prima facie, the GST rate of 12 per cent is way too high and it should be slashed to six per cent or below for all the homebuyers.