The high rate of Goods and Services Tax (GST) on under-construction properties (which was reduced recently) pointed to the fund crunch in the housing sector and also among non-banking finance companies (NBFCs), according to Indira Rajaraman, economist and a former member of the Reserve Bank of India’s board.
“In the earlier funding model (prior to GST regime), for construction of houses, housing companies got working capital through the sale of apartments before the construction even started.
“This had the property of getting consumer commitment [even] before the start of the projects,” she told, delivering the sixth Raja J. Chelliah Memorial Lecture on the topic ‘The Evolving GST’.
Dr. Rajaraman was pointing out to the construction sector is one of the examples of distortionary content under the GST.
She pointed out that for the under-construction property, the GST was 18% and with one-third abatement of the value of land, the effective rate was 12%. “Clearly, the taxation of pre-construction purchase at 18% with a simultaneous exemption of completed housing implied the intent to shatter that financing model, perhaps to squeeze out the use of untaxed cash (black money) in the construction sector,” Dr. Rajaraman said.
Post-GST, the construction sector turned for funding to NBFCs which had already received investible funds after demonetization flooded banks with cash in November 2016. This was followed subsequently by financing from mutual funds, she attached.
“The impact of this avenue of funding replacement in conjunction with uneven diligence by NBFCs and credit rating failure were among the many factors leading to the serial defaults by Infrastructure Leasing and Finance Company (IL&FS) in September 2018 and the contagion impact on NBFCs thereafter. There is also presently a huge build-up of unsold inventories of housing units,” Dr. Rajaraman told.