Goods and Services Tax (GST) is finally here and will be effective across the country from 1st July 2017. The new uniform tax regime has been formed to do away with the overlapping, double taxation system prevalent in our economy, saving end-users from shelling out various taxes on the same product at different levels. However, speculations are rife as to which items in the market will be cheaper and which won’t. When it comes to home prices, GST can have varying impacts.
While the construction cost of a building — including the value of land — could increase when taxed at a uniform structure of 12%, the input tax credit (ITC) on raw materials, now made available under the new GST regime, can lower the actual tax incidence.
Even though the introduction of input tax credit on key building materials like cement, steel, paints, and other items will reduce the net tax on finished products, the effect of GST might not be felt uniformly across the real estate spectrum. Let’s get into a segment-wise analysis of the GST impact on home prices.
The GST Impact on Affordable Segment Homes
Apparently, the GST Council has spared the affordable housing segment — a prime thrust area of the current union government — by fixing the GST rate at 12 percent, 6 percent lesser than the standard rate of 18 per cent. This essentially means that the net prices of homes in the affordable segment priced below Rs 3,500 per sq ft will most likely go down by 5 percent once GST makes its way in from 1st July
How GST Will Unfold for Mid to Premium-Segment Home Buyers
The scenario, however, is a bit different for premium home projects. Builders’ association, CREDAI foresees that apartments in the premium category could become pricier. CREDAI Chairman Geetambar Anand said homebuyers will gain significantly for projects that have a price-tag up to Rs 6,000 per sq ft. A premium project — according to CREDAI Vice President, Manoj Gaur — will not benefit much from GST but the new input credits, if allowed rightly, will be favourable to most homebuyers.
A major downside of the new taxation system effective nationwide is that it won’t consider any “abatement” (a reduction of taxation) for land, which is a key raw material for real estate developments. “The input tax credit is going to be available only on materials. So, if the component of land is more than the material cost, the tax incidence will go up,” a Telegraph report cited Abhishek Jain, a tax expert with E&Y. “The 12 percent tax has been arrived at keeping the land cost at one- third of the total cost,” Jain stated.
Mainly for this reason, non-metro and suburban areas such as Barrackpore, Sonarpur, Pailan, Baruipur, Barasat, etc. will profit from the tax reform as the cost of land in these neighbourhoods are lesser compared to upscale, high-demand locations, for example, Alipore, Ballygunge or Park Street.
A CRISIL report covering the new taxation policy states that real estate developers under the new GST system will be taxed at the rate of 18 percent and 28 percent for steel and cement respectively, and at a flat rate of 28 percent for inputs like white goods, paints, and other raw materials. These construction inputs, however, will be eligible for an allowance of credit on the taxes paid as the GST for final housing products has been finalised at 12 percent.
On the whole, realtors and tax consultants across the country feel that fixing the Goods and Services Tax for real estate at 12 percent is a buyer-friendly move that would either be tax neutral or might lead to lower tax liabilities on home purchases. The GST, put together, can possibly lower the cost of homeownership, reduce compliance costs, and bring in more transparency in the Indian real estate market.
Thanks for your article. Can you kindly confirm how will this apply to existing projects, where the developer may not be willing to pass on the input tax credit which he receives against GST.
Clause 171 in the GST bill provides that it is mandatory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices. This clause further provides for the establishment of an authority against anti-profiteering in order to ensure its compliance.
1) “These construction inputs, however, will be eligible for an allowance of credit on the taxes paid as the GST for final housing products has been finalised at 12 percent.”
2) “The input tax credit is going to be available only on materials. So, if the component of land is more than the material cost, the tax incidence will go up,”
3) “Even though the introduction of input tax credit on key building materials like cement, steel, paints, and other items will reduce the net tax on finished products, the effect of GST might not be felt uniformly across the real estate spectrum.”
Could you kindly explain, in layman’s English, what the above gibberish actually means?
Taken at face value, I’d say that your e-mail is more an attempt to obfuscate the issue, than to impart any actual clarity for the average citizen.
Scenario 1:
Let us assume a flat in an upmarket locality.
The sales price is Rs 10,000 per sq. ft.
Land Cost 7,000 per sq ft. (No input credit)
Construction material cost 2,000 per sq ft (input credit allowed, expected to be passed on to customer)
This tax saving due to input credit is a benefit to the customer.
GST charged to the customer on 10,000 per sq. ft. (includes profit)
Scenario 2:
Let us assume a flat in the affordable segment.
The sales price is Rs 3,000 per sq. ft.
Land Cost 1,000 per sq ft. (No input credit)
Construction material cost 1,500 per sq ft (input credit allowed, expected to be passed on to customer)
This tax saving due to input credit is a benefit to the customer.
GST charged to the customer on 3,000 per sq. ft. (includes profit)
Conclusion:
In the first case, the customer is expected to get the benefit of input credit on 20% of the price.
In the second case, the customer is expected to get the benefit of input credit on 50% of the price.
The customer’s benefit on a proportionate basis is far more in the second case.
We hope this will make things little clear to understand.
Earlier i used to pay 4.50% service tax on construction cost in each instalment excluding service tax on extra charges @15%.
Now i have to pay 12% GST on construction cost and 18% on extra charges.
Now Pl. tell me how i will be benefitted from this tax regim if i still have dues to pay Rs.10,00,000 as construction cost.
It seems that i have to shell out extra 79000/- for tax only.
This is absurd.
neeraj kumar modi.
Input tax credit will be on the total construction cost, so the developer is expected to pass on the same to the buyer. Consequently it will reduce the impact.
this percentage should be only on construction not on land part
land cost comes more than construction that makes loss position for buyers
It is not mandatory that land cost will be always higher than construction cost.
I have purchased a flat 2 months back. Recently came to know that I have to pay 12% from 1st July onwards. I have already paid 20% of the flat cost. Remaining 80% from loan. Till now, atleast one rupee is not disbursed for me. When I questioned the builder, they said that they don’t have clarity on this GST. Over all as per my calculation, I have to pay 1.8 lakhs extra. Please let me know how can I gain this loss. Please reply to me@ xxxxxxxxxxxxxxxxxx
Thank you for writing us your query. Though you have shared very little information, but what we can comprehend from this and suggest that, you should ask the developer to pass on the input tax credit to you.
Dear Sir,
This case related to Property transfer:
One of seller called Ms Vibha Dokania, she has clear all the dues to the builder before taking handover of the property (Flat).
Now, I am purchasing this property from the seller. As per the builder terms and condition the seller has to pay the transfer charges to the builder for nomination transfer of the property.
The seller submits the charges along with a request letter to the builder for nomination transfer of the property.
My query is: Do I need to pay any TAX amount to the builder, because of Service tax v/s GST difference. As mentioned, this is transfer case and this property yet to handover by the builder.
Pls guide.
Thank you for writing your query. Based on the facts given by you it can be comprehended that there is no further tax component left for you to pay the builder/developer.
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