New Delhi: Union and state governments on Sunday decided to lower Goods and Services Tax (GST) on under construction housing properties to 5% from an effective 12% in a pro-consumer decision ahead of national polls due by April-May.

GST rate on affordable housing projects too has been lowered from an effective 8% to 1%. Under-construction properties priced upto Rs. 45 lakh will qualify as affordable housing projects for the purpose of GST relief in both metro cities as well as non-metro cities, finance minister Arun Jaitley told reporters.

"We wanted to give a boost to the real estate sector as well as give relief to the middle class, neo-middle class and the aspirational middle class class. This will come into effect 1 April 2019," said Jaitley.

Although the cap on price of the property is ₹45 lakh for both metro and non-metro projects to get the 1% tax rate, they have to meet different carpet area requirements. Only those with the carpet area of 60 square metre in metros and 90 square metre in non-metros falling under the Rs. 45 lakh cap will be eligible for the 1% rate, explained Jaitley.

In both the cases, builders will not be able to adjust the taxes paid on raw materials like cement and steel against the final tax liability on under-construction properties. This was not the case earlier. The composition scheme announced for properties, like those applicable to restaurants and traders, consists of a small flat tax rate without input tax credits.

A videoconference of the Council's meeting held last Wednesday was adjourned as several states suggested a face to face meeting on Sunday was needed to discuss the issue thoroughly.

Sunday's decision was broadly based on recommendations of a ministerial panel led by Gujarat deputy chief minister Nitin Patel which favoured lowering the GST rate on under-construction properties.

The idea is to boost the real estate sector which is struggling with record inventories. At present, the effective rate of GST on under-construction properties is 12% after allowing for the cost of land, which is out of the purview of GST. Properties where the construction has been completed attract stamp duty, not GST.

The GST Council has been slashing tax rates to give relief to consumers despite the impact it has on the exchequer. Revenue secretary Ajay Bhushan Pandey said in an interview in Mint earlier this month that because of the rate reductions, benefit amounting to almost Rs. 90,000 crore a year has been given to consumers.

Builder lobbies, including the Confederation of Real Estate Developers’ Association of India (Credai) and the National Real Estate Development Council have been demanding a reduction in the GST rate for a while now.

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