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GST Rate Cut - Panacea or Brief Pain Relief for Real Estate?

Saturday, February 23, 2019

By  Anuj Puri, Chairman – ANAROCK Property Consultants

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:

  • A massive number of under-construction housing projects are heavily delayed or chronically stuck
  • The basic cost of homes is still far too high for the largest segment of the population
  • The prevailing credit squeeze on developers remains unaddressed
  • 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.
 
Need of the Hour - 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.

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