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Update on February 24, 2019: GST Council cuts tax on under construction residential houses to 5 per cent, from 12 per cent currently. GST rate on affordable housing slashed to 1 per cent from 8 per cent, with effect from April 1, 2019: Finance Minister Arun Jaitley. It was also decided to increase the sizes of homes from 30 sqmt to 60 sqmt for metros and from 60sqmt to 90 sqmt for non metros, to be considered affordable housing.
Update on February 1, 2019: Unfortunately, the Interim Budget 2019 has not reduced GST rates on homes. The interim FM Piyush Goyal shared that the GST council is awaiting recommendations from the council of ministers, to take a final call on the same.
A perception has gained ground in the Indian housing market that the Goods and Services Tax (GST), is only applicable to under-construction projects and hence, ready-to-move-in apartments are exempt from the GST. However, the tax calculations under the new regime, for the real estate market, are not so simple.
For example, the GST on under-construction projects will be charged to home buyers on the sale price but the credit can be availed by the developers, only on the cost of construction. As the builder will have to pay the GST on the full project and the input availed is only on the construction cost, there may be a gap that is no less than 30 per cent. Consequently, whether you opt for an under-construction property or ready-to-move-in unit, the developer will hike the prices in that proportion, to make sure this gap is bridged.
The Finance Ministry, on December 8, 2018, issued a clarification, saying that the GST will not be levied on buyers of real estate properties, for which the completion certificate is issued at the time of sale. However, the Goods and Services Tax (GST) will be applicable on sale of under-construction property or ready-to-move-in flats, where the completion certificate is not issued at the time of sale, it said.
Impact of the GST on apartments sold by developers
- Ready-to-move apartments will have no GST but the developer will only get input credits on construction costs.
- Developers will collect and pay GST on the cost of the project.
- Apartments may become costlier, due to GST compliances.
- The premium charged for ready apartments, will nullify any benefits from the GST.
Praveen Jain, a home buyer in Noida, has been told by his developer that the overall cost of his house, worth Rs 50 lakhs, would now be higher by Rs 1 lakh. If the GST is meant to simplify the tax structure and usher in an era of ‘one nation, one tax’, then, how come a home buyer is expected to pay stamp duty over and above the GST paid during the construction stage, he wonders.
“Even when service tax was not applicable on ready-to-move-in properties, developers were escalating the price during possession. With the GST regime, buyers will not benefit, as the developers will escalate the prices due to GST compliances during the construction stage,” laments Jain.
Tax implication of the GST on the real estate market
Industry stakeholders nevertheless, maintain that the GST regime offers many advantages for home buyers. The cost of construction is expected to reduce. Moreover, with input credit being available to developers, buyers who purchase after the Occupancy Certificate (OC) has been granted, will not have to bear the additional taxes that are part of the deal in the present market.
A CRISIL report points out that at present, a developer pays excise tax and VAT, on inputs like cement and steel, at 27.7 per cent and 18.1 per cent, respectively, which vary from state to state. Now, under the GST regime, cement and steel will be taxed at 28 per cent and 18 per cent, respectively, while other inputs like paint and white goods, will be taxed at 28 per cent. However, the final product – the housing unit – will be taxed at 12 per cent, with credit for taxes paid on inputs. As the tax levied on the entire cost including the land will be 12 per cent, the amount would be sufficient to provide for the input credit for developers. Hence, a buyer opting for a ready-to-move-in apartment, is saved from the tax burden.
GST forces stakeholders to evaluate new business models
Naushad Panjwani, managing partner with investment banking firm Mandarus Partners, points out that if the OC for the project has been received, then, no GST will be applicable. He feels that developers’ costs will come down with the input credit but a lot of clarity is still needed.
“Small suppliers are not required to register for GST, if their turnover is under Rs 75,000. In such cases, the builder will not get any advantage and would have to be careful in accounting. So, he may prefer to buy from registered dealers. Small vendors, therefore, will be impacted by loss of business,” Panjwani explains.
Nikhil Hawelia, managing director of the Hawelia Group, says that developers are already evaluating the benefits of the ‘build and sell’ model. According to him, under the new taxation structure and other regulatory frameworks, a market that offers ready apartments, makes more sense for buyers, as well as builders.
“A lot of buyers in under construction projects, are also inquiring whether they can advance their balance payment, to save the 12 per cent GST that would be applicable from the next quarter,” says Hawelia.
The GST is also applicable on financial services, at 18 per cent. Hence, loan processing charges are likely to increase in the GST regime. Such charges, always remains a cost in the hands of the buyer. It may not have much of an impact in the affordable housing segment, as the 18 per cent on loan processing charges in the range of 1 per cent, would be practically negligible. However, it will definitely burn the pockets of buyers in the high-end segment.
(The writer is CEO, Track2Realty)