The removal of input tax credit (ITC) on housing, ahead of the general elections, will bring back black money in the sector well known for deploying tainted wealth, say analysts.
"The government should have retained ITC at least for the normal category of housing that attracts 5 per cent GST. It not only reduced the cost of construction, but was making employment of black money in real estate difficult," Liases Foras MD Pankaj Kapoor told Business Today.
He said the implementation of GST had brought transparency in the system as the whole transaction trail could be monitored due to inter-linkages. "The moment you break the linkage, you create opacity in the system and black money finds its way in," Kapoor added.
The government has cut GST rates to one per cent without ITC from the previous 8 per cent for affordable homes and to 5 per cent without ITC for premium homes from the earlier 12 per cent. The move is expected to give the beleaguered realty sector the much-needed breathing room and help improve sales.
Finance Minister Arun Jaitley said builders will have to purchase a "very high percentage" of their inputs from GST-registered dealers. This will be decided by a committee and the move will ensure that the real estate sector does not go back to cash.
However, Kapoor said real estate and construction were very local subjects and it would not be easy to monitor input utilisation at such a micro level.
Rahul Prithiani, Director, CRISIL Research said the reduction in GST is a mixed bag for realtors. "While it will marginally increase end-user demand over the near-term, the withdrawal of input tax credit could impact the profitability of real estate developers. Developers will need price hike of two to four per cent to maintain margins, which seems difficult in current market scenario."
Anuj Puri, Chairman, Anarock Property Consultants, said an important factor in this rate cut is its timing. "With the general elections closing in, builders have been worried on account of the lower sales which were invariably a by-product of the period preceding elections. It would have been ideal of GST had been entirely removed for all residential property categories. This would have provided some serious acceleration for the market," he said.