Why Government Support on GST is Essential for 'Housing for All'

The Indian real estate sector, a key driver of economic growth, has been significantly impacted by the implementation of the Goods and Services Tax (GST). Introduced in 2017, GST replaced multiple indirect taxes with a unified tax system, streamlining compliance but also creating challenges.

Currently, GST rates for under-construction properties are set at 12%, compared to 4.5% under the previous service tax regime. While this shift was aimed at enhancing transparency, it has increased costs for developers, leading to higher property prices.

Developers face the challenge of not being able to claim Input Tax Credit (ITC) on residential projects, which limits cost efficiency and makes housing less affordable.

The GST rate for affordable housing was reduced to 1% in 2019, yet the lack of ITC means that developers' costs remain high, often passed on to buyers.

According to a recent report by Knight Frank, this has led to a shift in buyer preference towards ready-to-move-in properties, which are exempt from GST, slowing down sales of under-construction units.

To realize the ambitious ‘Housing for All’ mission, government intervention is crucial. Streamlined GST policies, enhanced ITC provisions, and simplified compliance can reduce costs, stimulate investment, and make affordable housing more accessible for millions of Indian families.

Current GST Framework in Real Estate

The Goods and Services Tax (GST) has been a transformative step for the Indian real estate sector, replacing a complex web of taxes with a single, unified system.

Before GST, developers had to navigate multiple levies such as VAT, service tax, and stamp duty, which often led to inflated costs and lack of transparency.

Today, GST rates are streamlined: affordable housing is taxed at 1% without Input Tax Credit (ITC), non-affordable residential properties at 5% without ITC, and commercial properties at 12% with ITC.

While this unified tax regime has simplified compliance, it has also brought new challenges. For example, the 12% GST on under-construction properties has led to a noticeable increase in project costs, as developers cannot claim ITC on inputs.

This increased tax burden is often passed on to homebuyers, making under-construction properties less affordable.

According to a report by JLL India, this has contributed to a 20% dip in sales of under-construction units over the past few years, as buyers now prefer ready-to-move-in properties that do not attract GST.

Despite the reduced GST rate of 1% for affordable housing, the lack of ITC has limited cost efficiency for developers. This constraint has kept housing prices elevated, challenging the government’s ‘Housing for All’ mission.

If the GST framework were to allow ITC on construction materials and simplify compliance further, it would incentivize developers, reduce construction costs, and make housing more affordable for millions of families across India.

Challenges Faced by Developers Due to Lack of Input Tax Credit (ITC)

The absence of Input Tax Credit (ITC) in the GST framework for under-construction properties has been a significant challenge for developers across India.

Unlike commercial projects where ITC is allowed, developers of residential projects cannot offset the taxes paid on construction inputs like cement, steel, and other raw materials.

This lack of ITC means that the cost of construction remains high, and these expenses inevitably get passed on to homebuyers, raising the final price of under-construction properties.

A report by Knight Frank India highlighted that this has increased the overall cost of residential projects by 5-7%, making housing less affordable, especially in urban markets where demand for mid-segment and affordable homes is already under pressure.

Without the ability to claim ITC, developers face tight cash flows, as a considerable portion of funds remains tied up in tax payments. This situation affects their ability to invest in new projects and often leads to delays in project completion.

Additionally, the compliance burden under the GST regime is substantial. Developers must maintain detailed records, manage complex tax filings, and navigate frequent changes in regulations, which adds to operational costs. Smaller developers, in particular, struggle to keep up, affecting their competitiveness.

Impact of GST on Affordable Housing and Market Demand

With a 1% GST rate on affordable projects, the government aimed to boost the sector and align with the ‘Housing for All’ initiative.

This reduction has encouraged developers to focus more on affordable housing, leading to increased project launches in this segment. However, challenges remain, particularly for under-construction properties.

While the reduced GST rate is beneficial, the high tax burden on other under-construction properties, where GST is set at 5% without Input Tax Credit (ITC), continues to deter many buyers.

This higher tax, coupled with the inability to claim ITC on construction inputs, raises the overall project cost, which developers often pass on to consumers. A recent report by ANAROCK Property Consultants indicated a 30% drop in sales for under-construction units in Tier-1 cities as buyers increasingly shift to ready-to-move-in properties, which are exempt from GST.

This shift in buyer preference poses a challenge for developers, who face tighter cash flows due to sluggish sales of under-construction projects. The lack of ITC adds to these pressures, making it harder for developers to maintain competitive pricing.

Allowing ITC on under-construction properties and revising GST policies could significantly improve market sentiment, reduce costs, and stimulate demand, particularly in the affordable housing sector, which is key to achieving India's housing goals.

Why Government Support is Essential for Achieving 'Housing for All'

Achieving the ambitious goal of 'Housing for All' in India requires strategic government support, particularly in the form of GST policy reforms.

Currently, while affordable housing benefits from a reduced GST rate of 1%, other under-construction properties are taxed at 5% without Input Tax Credit (ITC).

This structure increases the cost burden for developers, which is eventually passed on to homebuyers, making housing less affordable. To stimulate investment, revising GST policies to allow ITC on all residential projects can significantly reduce costs and improve market dynamics.

The absence of ITC on construction materials has been a long-standing issue for developers. Without the ability to claim credits for the GST paid on inputs, developers' costs remain high, affecting their pricing strategies.

A report by JLL India highlighted that granting ITC could reduce overall construction costs by 5-7%, directly benefiting homebuyers through lower property prices. Enabling ITC would also improve developers’ cash flows, encouraging them to invest more aggressively in affordable housing projects, which is critical for expanding the housing supply.

Additionally, the current GST compliance regime is complex, involving frequent updates and detailed record-keeping.

Recommendations and Future Roadmap

One key area is revising GST policies. Allowing Input Tax Credit (ITC) on construction materials for residential projects could significantly lower costs for developers.

A recent report by Knight Frank suggests that enabling ITC could reduce overall construction expenses by 5-7%, which would be passed on as cost savings to homebuyers, making housing more affordable.

Revisiting GST rates for under-construction properties, particularly in the mid and premium segments, can also stimulate demand, helping developers recover their investments faster.

Clearer regulations and simplified compliance procedures are equally important. The current GST regime, with its complex tax filings and frequent changes, creates uncertainty for developers, especially smaller firms.

Streamlining compliance will not only reduce administrative burdens but also build confidence among investors, encouraging more players to participate in affordable housing projects.

A collaborative approach between the government and the real estate industry is essential. Policy adjustments alone won’t suffice; there needs to be a dialogue to ensure regulations are practical and beneficial for all stakeholders.

This includes consistent engagement on issues like land acquisition, financing, and urban planning.

By addressing these key areas, the government can create a more conducive environment for developers to build affordable homes, driving economic growth and supporting India's vision of 'Housing for All.'

Conclusion

Government support is crucial for driving growth in the real estate sector, especially when it comes to achieving the 'Housing for All' initiative.

Revising GST policies, particularly by allowing Input Tax Credit (ITC) on construction materials, can significantly lower costs for developers, translating to more affordable housing for buyers.

For the ‘Housing for All’ mission to succeed, a collaborative effort between the government and industry stakeholders is vital.

I urge policymakers, developers, and financial institutions to work together to create an environment conducive to affordable housing.

By addressing tax issues and improving regulatory frameworks, we can build a more inclusive real estate market that supports economic growth and ensures that quality homes are within reach for every Indian family.