Can the GST Rate cut be a brief pain relief?
Even the slightest sentiment boost goes a long way in increasing sales by a certain percentage in the sector.
The recent interim budget announced fresh sops for the Indian real estate sector – which, on closer scrutiny, did not really send clear revival signals to the market at all. Now, the strident demand for lowering GST rates on under-construction properties is on the table.
In fact, the prime minister and finance minister have proactively assured that they are considering this collective demand from the industry positively. Will a GST cut infuse enough positive sentiment to help the languishing real estate sector revive?
Perhaps, rather than debating whether a GST cut will do the trick, we should ask ourselves whether it would actually solve the ‘real’ problems the sector is facing.
The general expectation is that a few sops here and there will bring in the much-needed respite, when they actually only give a momentary infusion of notional positive sentiment. They can be likened to doses of painkiller to a suffering patient while they quell the symptom of pain for a while, they do nothing to cure the underlying cause of the pain.
For the real estate sector, the fundamental causes of its pain are: n A massive number of underconstruction housing projects are heavily delayed or chronically stuck n The basic cost of homes is still far too high for the largest segment of the population n The prevailing credit squeeze on developers remains unaddressed n RERA is not a national force
but more of a regional one A GST rate cut does nothing to solve these problems. It could be argued that the marginally increased sales would ease developers’ funding issues. However, a small boost in sales will not put a serious dent in their existing debt or solve their funding issues. It would be symptomatic relief, at best.
THE COST OF A HOME
Let’s examine the actual benefits that a buyer gets after and before a GST rate cut. For an under-construction apartment sized 1,000 sq. ft. and price-tagged at Rs. 5,000 per sq. ft., a buyer currently pays approximately Rs. 4.2 lakh as GST, assuming that the builder has passed on the ITC benefit of nearly Rs. 1.8 lakh to the buyer.
If the GST rate is slashed to a flat 5% without the ITC benefit, this buyer will have to scoff up Rs. 2.5 lakh as GST. So, he essentially saves Rs. 1.7 lakh if the GST rate cut happens. However, will a saving of Rs 1.7 lakh on a home that costs Rs. 50 lakhs really trigger a surge of home sales big enough to bail it out?
No doubt, even a slightest sentiment boost goes a long way in increasing sales by a certain percentage. Nevertheless, we are currently looking at a humungous unsold stock of 6.73 lakh units across the top 7 cities, and new units are being added every month. The sector would need some phenomenal triggers to shed this burden.
A DIFFERENTIAL TAX SYSTEM
Even though 2018 witnessed green shoots of revival as far as sales and new launches were concerned, housing sales numbers were largely dominated by ready-to-move-in units which are exempt from GST.
While the 12% GST levy on under-construction properties certainly proved to be a deterrent to buyers, the uncertainty of project completion was a far more serious dampener.
Also, more than the high GST rate, it is the differential tax treatment for under-construction and ready-to-move-in properties which has exacerbated the slowdown in the real estate sector. Buyers deferred their purchases until a project obtained the completion certificate so that they would save on GST altogether. This put an additional burden on builders who need to finance their projects to completion, since advance sales were very sluggish.
ANAROCK data indicates that out of the total unsold stock of 6.73 lakh units in the top 7 cities, only 13% are ready-tomove-in (RTM). Out of the remaining 5.88 lakh unsold under-construction units, 20% are slated to be completed by 2019. If they do get completed as per this schedule, another 1.16 lakh units will be added to the RTM category.
Naturally, buyers will continue to prefer RTM units which are altogether free of GST rather than under-construction homes which do attract this tax. The contest between a lower GST and no GST at all is a no-brainer apart from the fact that buyers of RTM homes have the benefit of instant gratification, freedom from project completion uncertainty, and savings on rental outgo until the project is completed.
Given that the previously significant price gap between RTM and under-construction homes has reduced remarkably, a reduction in GST will not be a panacea to heal the major woes of the housing sector. The differential tax treatment between the two is by itself a sentiment dampener.
A BIGGER GAME PLAN
Rather than a GST rate cut, it is the recent hint at a possibility of uniform taxation of under-construction and RTM homes which would really help.
A GST rate cut would compel a few more fence-sitting buyers to take the plunge, but it will not serve the purpose of making under-construction properties as attractive as RTM properties.
Limited advance sales will continue to curtail cash flows for developers who will have to resort to other financing options. Apart from the fact that private equity is an option only to players with exceptionally strong balance sheets and completion records, PE also comes at higher interest rates.
NBFCs are in dire straits and banks have curtailed credit to builders, despite instructions from the RBI to ease lending norms.
This increases the overall costs they incur on their projects, and this cost is being passed on to buyers in one way or the other.
The real estate sector may experience a minor, temporary lift on the back of a GST rate cut, and a bigger, longer-lasting lift of the differential tax is done away with altogether and one uniform tax is applied.
However, the larger issues of the sector that need to be addressed are:
Reducing the dependency of builders on external funding sources.
2018 supply trends indicate that builders are cautiously trying to bridge the demand-supply gap by launching projects in segments that have maximum demand. This proactiveness should be reciprocated by easing of lending norms.
Failed or delayed projects have severely diminished buyers’ faith in under-construction properties.
This issue must be addressed via measures to ensure that such projects are either completed or their buyers are refunded in full, so that their home buying options open up once again.
RERA implementation across all major states cannot remain on paper or on bureaucratic discussion tables.
The author is Chairman – ANAROCK Property Consultants Family disputes over inheritance of ancestral property are common, often between two or more generations. Sometimes, your parents or a family member may waive off rights in their inheritance for various reasons, including a dispute. Usually, any property that a person holds is selfbought, inherited or held by a coparcener in case of a Hindu Undivided Family (HUF). If the property is self-acquired, the owner can bequeath it as per his wish. But if the owner has inherited a property through a Will or otherwise, his children are also considered legal heirs to that property. A person who receives a legacy under the Will, or who receives a property after the death of a person is called the legatee or legal heir. However, if the legal heir chooses to give up rights in the inheritance, he or she will have to present a written letter in favour of other heirs, stating they are giving up their claim in the said property and in such a case, the children of this person will also not be able to stake claim over the property in future. According to Section 104 of the Indian Succession Act, 1925, the legal heir would have a vested interest in the legacy after the death of the person who made the Will. But Section 332 of the same Act says that the approval of the administrator—a person appointed by the court to administer the assets of the deceased person, typically, in the absence of a Will—is necessary in order to give the legal heir complete rights to his or her legacy. According to this Section, the assent of the administrator is required only to complete a legal heir’s title to his or her legacy and not for its acquisition. However, if a person forgoes the right before the approval of the administrator, then his or her children or family member will have no right in the said property. In case the property has already been transferred to the legal heir by the administrator, he or she can still relinquish rights in the legacy by executing a “deed of release” of his or her rights in the property duly executed and stamped. A deed of release typically is a document that releases involved parties in a deal from various obligations. Also, since real estate is an immovable property, the deed of release would require to be registered under the Indian Registration Act, 1908.
Section 8 of the Hindu Succession Act, 1956 says inheritance of ancestral property after 1956 does not create an HUF property. The inherited property is to be considered as self-acquired and the inheritor can, thus, waive off rights in the property which would also bind on the inheritor’s legal heirs. Before 1956, according to traditional Hindu law, if a male member of an HUF inherited a piece of property from his paternal ancestors until three generations above him, then his male legal heirs up to the next three generations or degrees had an equal right in the ancestral property. In this case, the question of conflict that arose often was whether a male family member could give up or waive off his rights to his ancestral property and whether such waiver would be binding upon his legal heirs. As per this law, the male ancestor inheriting ancestral property could not waive off his rights because doing so would deprive his male legal heirs from their share in the ancestral property which would vest in the heirs as HUF property.
There is no distinction between an inherited, self-acquired property and ancestral property in case of Christians, Muslims and Parsis. Thus, the legal heir has absolute right to relinquish his or her right in the property.
Source : Ht