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The Goods and Services Tax (GST) Council in its meeting held on February 24, 2019, has taken a decision to reduce the GST rate on under construction properties, with effect from April 1, 2019. As per the present rules, the GST is levied only if you book a property during its construction phase. Once the building gets its completion certificate, the government is not empowered to levy any GST. Under-construction properties are classified under two categories for the purpose of levy of GST – affordable housing and regular housing. Presently, the rate of GST for an under-construction property is 18 per cent but an abatement of one-third for the cost of the land involved, is allowed on the gross value of the property. So, GST is levied only on two-thirds of the value of the property at 18 per cent, making the applicable rate 12 per cent, on the entire value of the property. Likewise, properties which are covered under the affordable housing segment, are subjected to 8 per cent GST on the gross value of the property.
GST on real estate: Changes proposed by the GST Council
The GST Council has proposed to reduce the rate of tax on both the categories. For houses under the affordable housing category, the rate is proposed to be reduced from 8 per cent to 1 per cent, whereas for other properties it is proposed to be reduced from 12 per cent to 5 per cent, with certain other modifications on the computation of GST liability of the developer. These changes will not come into effect immediately but are scheduled to be implemented from April 1, 2019.
Presently, while levying the GST on home buyers, the developers are allowed to claim set off of the GST already paid by them for the supply of various inputs for construction of the property, like cement, marble, granite, iron, paint, etc. This is called ‘input tax credit’. The developers are supposed to pass on the benefit of the input tax credit to the home buyers, in the form of reduced base prices of the houses. As there was no mechanism to verify whether the developer actually passes on the benefits of input tax credit to the home buyers, there was a perception in the minds of the public and the government that the benefit of input tax credit was not passed on to the home buyers. So, while reducing the GST rates on these two categories of under-construction properties, the GST Council has decided that while availing of the benefit of lower rates of GST, the developers will no longer be able to avail of the input tax credits, with respect to GST paid on the inputs. In order to ensure that it does not lose its GST revenue, the government, while making the relevant rules, will propose that the developers will be under an obligation to source their raw materials from GST-registered suppliers and pay GST on their inputs. This will ensure that the government is able to collect the tax, with respect to the inputs used by the developer but will not have to concede any part of it to developer. Rather than losing on revenue due to the reduced GST rates, the government may, on the contrary, garner more revenue from the real estate sector due to the proposed bar on input tax credits.
Will the reduction in GST rates on real estate make homes cheaper?
Home buyers should not expect much relief in the long run, as the proposed rate cuts in GST come with the bar on setting off of the input tax credits, on the inputs used by the developer in the construction of the house. In my opinion this proposal may, in fact, boomerang.
With the present rate of GST on affordable housing and other houses being 8 per cent and 12 per cent, respectively, against the GST on inputs like cement at 28 per cent and marble, granite and iron in the 18 per cent slab, the developers are able to lighten their cost of construction and hence, the GST collected from the customers, due to the availability of the input tax credit. With the new rules, this will not be available and will have to be borne by the developer. This situation will force the developers to increase their base price before GST.
Although it appears that the GST rates have been reduced by a substantial 7 per cent, the real impact may almost be negligible or may be negative and ultimately may not result in any benefit to the home buyers, as property rates are bound to go up, at least to offset the loss caused to the developers due to the bar on input tax credit under the new regime.
Even if it is assumed that houses will become cheaper by 7 per cent after April 1, 2019, it is unlikely that the people will be incentivised to choose an under-construction property, when many of them have already burnt their fingers. A saving of just seven per cent, is not worth risking 100 per cent.
The reduction in the rates of GST, will neither make houses affordable for the home buyers nor will it help revive the real estate sector. If the government really wants to help the home buyers, as well as the real estate sector, it should not only allow the input tax credit but also allow the refund of the excess taxes paid on input on a yearly basis.
What will be the GST rates for those who have made part payments for under-construction homes
People who have already booked their flats and have made part payments, can save money as the cost of the apartment has already been fixed. What will change is only the rate of GST applicable on the instalments that have not yet been paid, if they are able to get the demand for the instalment issued after the new rates come into effect.
As per GST rules, the GST is payable on the earliest of three occasions:
- Receipt of payments
- Raising of invoice
- Completion of service/supply of goods.
So, if you can get the developer to issue the invoice/demand for the remaining instalments, on or after April 1, 2019, you will be able to avail of the reduced rates of GST. If the building is nearing completion and the completion certificate is expected to be issued before the new rates come into effect, you will not be able to get the benefit of the reduced rates. However, the developer may not be willing to accommodate such requests, as this involves delay in receipt of money for him, as well as losing the benefit of input tax credit on the instalments subjected to the reduced rates of GST. In genuine cases, where the due date of the instalments fall after March 31, 2019 and the builder does not play mischief by raising the invoice before this date, you will be able to get the benefit of the reduced rates.
(The author is a tax and investment expert, with 35 years’ experience)