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GST cut to boost sales of under-construction flats; no ITC may hit builders’ profit margin: Moody’s

Credit rating agency Moody’s on Wednesday said the GST rate cut on under-construction flats will boost housing sales, but may hit profit margins of builders with withdrawal of input tax credit.

The GST Council had on Sunday decided to cut goods and services tax (GST) rate on affordable homes to 1 per cent without input tax credit (ITC) from earlier 8 per cent with ITC.

The GST on under-construction flats, which is not under the affordable housing segment, has been reduced to 5 per cent without ITC from earlier 12 per cent with ITC.

“The reduction in GST is credit positive for India’s property developers…because the reduction in tax will boost demand and increase sales of properties under construction,” Moody’s Investors Service said in a statement.

“India’s real estate sector has weathered difficulties in the last few years amid price reductions from a glut of inventory and lackluster demand. The reduction in GST will improve housing affordability as the amount to be paid by a potential house buyer will be reduced, which will increase demand for property,” it added.

The reduction in GST rate on affordable housing is in line with the government’s increased focus on this segment, Moody’s said.

“The new GST measures eliminate the ability to claim input tax credit, which may hit the profitability of the developers,” the rating agency said.

Currently, the developers are able to reduce the tax liability when it makes a sale by claiming tax paid on goods and services required for the construction of properties. “This will further impact developers’ profit margins that are already under pressure.”

Moody’s said that the developers have the option to mitigate this loss by increasing prices slightly given that overall pricing for the customer has reduced with lower GST.

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