Completion Certificate requirement to hit real estate sales – analyst

Last Week’s clarification by the Union Finance Ministry that GST exemption is available only for properties with completion certificate is likely to hit real estate developers, a prominent consultancy firm said.

The ministry had last week said that buyers have to pay Goods & Services Tax on any new flat that did not come with a completion certificate.

A completion certificate is issued by local government bodies after inspectors are satisfied that the builder has stuck strictly to the building plans submitted to them.

In practice, most builders do not bother with the completion certificate either because they have made substantial deviations from the approved building plan, or because they fear that inspectors will reject their applications on flimsy grounds in anticipation of illegal gratification.

Moreover, completion certificates are not required for the sale and transfer of the property to the buyer, or for subsequent resale by the buyer.

However, with the finance ministry setting the cat among the pigeons with its GST clarification, builders will either have to get completion certificates or adjust their prices to account for the 12% GST.

Under Indian laws, all incomplete properties are subject to GST, while completed projects, including resales, are not.

Pune-based Anarock Consultants estimates that about 14% of the 6.9 lakh unsold residential properties in India’s top seven cities are technically ready-to-move-in.

“With this announcement, developers are now left with no choice but to absorb the GST charges in ready-to-move projects that have not been given completion certificates,” said Anuj Puri, chairman of Anarock Consultants. “If they attempt to pass this additional burden on to their buyer, their ready-to-move-in units without completion certificates will be at par with under-construction projects in terms of cost to buyers.”

He said developers were already struggling with the prolonged slowdown in the Indian real estate market that has created a huge unsold inventory.

To cope, the builders have been leaving no stone unturned to sell their projects and generate cash. Most recently, the sudden drying up of funds in the non-banking financial services sector — including housing finance companies — has also affected the real estate sector, he pointed out.

“The sudden NBFC crisis jolted the sector and fund-raising became a major concern. Amidst all this, developers were cashing in on the buyers’ preference for ready-to-move-in units since these were not liable for GST,” he noted.

“The additional GST levy on ready-to-move-in units without completion certificates is an extra cost which developers simply cannot afford to pass on to their customers.

“Given their existing woes with regards to unsold inventory, developers have little choice but to absorb this additional cost either partially or completely if they want to keep sales going,” he added.

The latest clarification could also lead to buyers increasingly preferring to buy from investors and owners, instead of from the builders directly.

“The secondary real estate segment does not attract GST as such properties are by definition complete. Buyers eyeing ready-to-move-in units will now certainly evaluate this option rather than paying 12% GST on first purchase units,” he said.

He also said that projects that have been approved as “affordable housing” could see higher demand as they attract only 8% GST.

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