A survey conducted by CREDAI indicates that the second wave of the pandemic has resulted in delayed projects and made housing expensive. CREDAI has proposed solutions for the Government to take into consideration
The second wave of Covid-19 has dealt a massive blow to the real estate sector, with apartments and homes becoming more expensive and construction delayed. A study by the Confederation of Real Estate Developers’ Association of India (CREDAI) found that construction activity –particularly in the affordable and mid-range segment-has been affected due to the exodus of migrant labourers and delays in approvals.
CREDAI has stated that the real estate sector was already bearing the domino effect of the first wave as the disrupted supply chain had barely started to recover, and now, with States imposing fresh lockdowns and curfews, the supply chain will continue to stay affected. Further, CREDAI’s Report said that normalcy could take six to nine months to return.
The Association’s Report also makes mention of those who wanted to buy new homes, given that construction costs has increased between 10% to more than 20%. The prices of cement, steel, labour and other supplies have soared.
All these aspects together, are expected to put a strain on real estate transactions and project completions. Goa’s real estate market is expected to remain inert for several quarters.
NATIONAL RESEARCH FINDINGS
- 78% developers feel stamp duty waiver / reduction will help in demand creation.
- 75% developers feel Input Tax Credit (ITC) on GST and others will improve financial viability of projects.
- 66% developers feel loan restructuring will help in alleviating financial constraints.
- Sharp increase in cost of construction material is a major concern for developers (especially cement, steel, aluminum, copper, PVC and plastic prices).
- Single-window clearance for all project approvals and work commencement will help in expediting project completion.
ADDITIONAL SOLUTIONS PROPOSED BY CREDAI NATIONAL
Extension of all the existing approvals accorded to real estate by 9 months.
In case of real estate, even after the lockdown is lifted, it will take months to mobilize labour and materials. Though States have exempted construction activity from the lockdown, the mass movement of labour back to their home States, along with States imposing fresh curfews, the supply chain will continue to stay affected. These factors will have a direct impact on project timelines leading to delays in under- construction properties and will come under the ambit of RERA violations. Rapid vaccination leading to decrease in infections and deaths will restore the confidence of labour and only then will labour return to the sites. Going by the experience of the first wave, the situation would take 6-9 months to return to normalcy.
Relief package for Covid-19 second wave for the Real Estate Sector
CREDAI believes that the following measures need to be brought in on an urgent basis so that immediate relief can be given to the industries:
- Moratorium on existing debts across borrowers towards principal and interest for all loan classes including SMA 0, SMA 1 and SMA 2, for all loan types including working capital, term loan, non-convertible debentures (NCD), etc needs to be brought back for the next 6-12 months, so that borrowers can get relief against the effects of lockdown affecting the livelihood of all. CREDAI also pleads that there should be no compounding interests on the moratorium period as per the relief given by the Supreme Court vide order dated 23 March 2021.
- Freezing of SMA classification for loans for the next 12 months so that industries can use this time to work on revival of their already stressed businesses.
- Freezing of Insolvency and Bankruptcy Code (IBC) action against borrowers.
- Support of liquidity to industries by additional measures like:
(i) Lowering LTV of working capital loans so that additional liquidity can be given to existing borrowers.
(ii) Bringing out additional ECLGS schemes for the sectors notified by the K V Kamath Committee.
(iii) Extension of DCCO of existing loans by another 2 years to ensure existing loans doesn’t slip into SMA and NPA rating.
Proposed Amendments in GST by Real Estate industry in Goa
There is a need for multi-pronged approach to revive the housing and real estate sector in Goa – and amendments in GST is one of them. It is 4 years since GST was introduced with an objective of ‘One Nation One Tax’ and seamless flow of credit across the supply chain; and real estate developers were quick to adopt transparent practices in their businesses.
A. Option to choose between scheme of 12% GST (8% for affordable housing) with Input Tax Credit (ITC) and Composition scheme of 5% (1% for affordable housing) without ITC.
Under the composition scheme, the developer is not allowed to avail the credit of input tax paid in the process of procurement of goods and services. In housing and real estate, construction sector, most of the purchase of goods and services is done at 18% GST, with cement being at 28% GST. The total value of per square foot GST cost is anywhere between `360 per sq.ft to `500 per sq.ft, depending upon the project specifications.
This has resulted in proportionate increase in the cost of construction since no input credit benefit is allowed post advent of the composition scheme. This defeats the very basic objective of creating affordable and mid income housing for the society. CREDAI Goa states that the developers should be given an option to choose between 12% GST rate with ITC (Assessment scheme) and 5% GST rate without ITC (Composition Scheme). This would also be keeping in line with the spirit of the Act which provides for free flow of credit across the supply chain and avoids double taxation.
B. GST on Works Contract services
Basically, contract services qualify for the definition of Works Contract Services under section 2(119) of the CGST Act, 2017 as it has elements of both provision of services and sale of goods. Government had bi-furcated the work contract services into two broad heads for the purpose of deciding the rate of tax applicable which are:
- For Composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017 GST rate of 18% is applicable on Non-Governmental Works contract services.
- For Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the Government, a local authority or a Governmental authority a GST rate of 12 % is applicable.
To ensure parity, GST on Non-Government / private works contract services too should be charged at 12%.
C. Eligibility of Input Tax Credit of construction of property for renting/leasing purposes
As per the GST law, any lease or letting out of such constructed immovable property will be deemed to be service and taxable under GST at the proposed rate of 18%.
However, as per Section 17(5) of GST law, credit is restricted for goods / services procured for construction (which includes renovation, repair etc) of an immoveable property when such property is for own use (such as further renting out). Furthermore, input tax credit for construction (including renovation, repair, alteration etc) is disallowed which is against the principle of GST to provide a seamless credit chain. The foundation of GST regime was to allow credit offset across the entire transaction chain and such credit restriction leads to a blockage of credit and hence, increases tax costs.A
CREDAI has submitted that the ITC restriction leads to enhanced cost burden on the total cost of construction of the property and will escalate the project costs. Moreover, high rate of GST on inputs/input services will have an adverse impact on the working capital of the company especially in the prevailing situation of decelerating growth amidst COVID-19.
CREDAI suggests that one of the primary objectives behind the introduction of GST is to enable seamless flow of input tax credit across the value chain. The additional costs on account of blocked credit will be crippling for the industry. Accordingly, it is suggested that the restriction to avail ITC should be removed to ensure seamless flow of credit to businesses where the property being constructed is being used for further providing an output service (such as renting, hotels, malls etc).
D. GST on Cement
There has been continuous surge in prices of construction raw materials including cement since January 2020. In the first quarter of 2021, cement prices rose by approximately 25%.
The high prices of cement directly affect the affordability of houses, thereby making affordable housing unviable. To mitigate this situation, CREDAI has suggested that GST on cement should be reduced from 28% to 18%.
(Excerpts from a Report by CREDAI National Research: a Study on the Impact of the Covid-19 Second Wave on Real Estate Sector in India)
