The economics of redevelopment projects, a kind of urban real estate renewal method where real estate players take over old buildings and rebuild them, has gone awry in recent years after the implementation of the GST in 2017, according to industry trackers.
The problem arises because of the way the GST is calculated on these projects.
âGST is paid on the one hand on the construction cost without input tax credit, and on the other hand, when the area is delivered to existing residents at market price. Both GST payments are absorbed by a developer, which often becomes a huge cost, âsaid Rohit Jain, partner at ELP law firm.
Tax experts say all redevelopment projects are now facing problems due to the higher costs of the GST.
The best real estate developers have now called on the government to be lenient in the way the GST is collected.
Real estate players say they have seen disruption during the Covid-19 pandemic over the past two years with rising costs, declining income and other issues such as labor shortages.
In a typical redevelopment project, a real estate developer takes over a project and rebuilds it with additional space and apartments.
In most cases, the original residents return to their apartments with a little extra space or to larger apartments.
GST regulations require that tax be first paid when the developer undertakes construction and that there is no input tax credit available on that development.
The input tax credit is a mechanism by which a portion of the GST paid on raw materials can be deducted from future tax obligations.
Industry trackers say the biggest problem for real estate players is when they return apartments to original residents.
In accordance with current regulations, even in cases where the original residents pay nothing when they collect the larger apartments, 5% GST must be paid.
GST must be paid according to the market price on these apartments.
Since the original buyer pays nothing, this cost will in most cases have to be absorbed by the real estate developer, according to tax experts.
Industry trackers say some of the biggest redevelopment markets, including Mumbai, have seen real estate developers walk away from redevelopment projects.
This is not the first time that the real estate sector has grappled with the tax authorities.
Previously, the real estate sector had encountered problems following a government notification of joint development agreements.
Joint development agreements are a common feature in the real estate industry where the landowner transfers the land to the developer and gets apartments, a certain amount of income, or a combination of both, in return.
According to a notice issued in January 2018, GST was payable by both the landowner and the developer.
The GST notification was aimed at levying taxes even on landowners, which was later challenged in court.
Real estate developers had taken the GST Council, central and state governments to court for including such transactions under the GST.