GST on Real Estate: Lower GST Rate Expected On Affordable Homes

GST on Under Construction Property: Lower GST Rate Expected On Affordable Homes

The government agreed to lower the Goods and Services Tax (GST) on under-construction affordable homes under 60 square meters to 8 percent from 12 percent, Rajiv Talwar, chairman of National Real Estate Development Council, told reporters.

GST on Under Construction Property: Lower GST Rate Expected On Affordable Homes

Real estate companies have been pitching for a lower rate across the board. In a meeting with Ministry Of Finance officials, they demanded a 6 percent GST on all under-construction homes, Talwar, said. And input tax credit should continue, he mentioned.

Homebuyers currently pay 12 percent GST in addition to stamp duty and registration levied by states.

If the Government of India reduces GST on Real Estate from 12 percent to 6 percent, a new slab of 6 percent will have to be created, said Abhishek Jain, indirect tax partner at EY India told BloombergQuint. “For the 6 percentage-point reduction, they will have to think through the revenue implication if they wish to go ahead with this change.”

No GST is levied on homes sold in completed projects.

Watch this discussion with Rajan Bandelkar, vice-president at NAREDCO and Abhishek Rastogi, partner at law firm Khaitan.

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“Capping GST at 6% will incentivise buyers to invest in under-construction properties, who otherwise are waiting for completed properties to save 12% GST,” said Rajeev Talwar, chairman of Naredco. “Buyers stand to benefit as developers would pass on the benefit to the buyers. The government also stands to benefit as it will collect more tax because of increase in demand. This is a win-win situation for all.”

According to Naredco president Niranjan Hiranandani, the industry body has also urged the government to increase the abatement for land cost to 50%, from the existing 30%, as cost of land forms the most significant part of any real estate-project cost.

GST on Under Construction Property

Real estate properties which are under construction is governed by the ‘works contract’. The GST Council had announced four rates for services – 5, 12, 18 and 28 percent. While 5 percent rate is mostly for transportation services, rates for restaurant services will vary as per tariffs charged and facilities provided, ranging from 12-18 percent; Gambling and cinema services will fall under 28 percent slab, as entertainment tax merged with service tax under GST while works contract is taxable at 12 percent with full input tax credit.

Under the current tax regime, works contract attracts a service tax rate of 6% which is a reduced tax rate under a special scheme known as the abatement scheme and a value added tax or VAT that currently ranges from 1 to 5 percent depending from state to state. While paying these taxes today, developers do not get a deduction of the input tax but under GST they will. This means that on the amount of excise duty and VAT they pay on cement or steel, no set off is available to them but under the new GST regime, developers and builders will be able to get benefits on taxes.

“The full availability of input credit as compared to current regime (where input credit is not available on excise duty paid on certain raw material inputs) is expected to be beneficial for reducing project costs under the GST system,” says Shubham Jain, vice president and sector head, ICRA Limited.

But will this reduce or increase the price of properties? “Houses will be cheaper or expensive depending on the current value added tax prevailing in different states. For example, if the current VAT is 2 percent and service tax rate is 6 percent, then though the total tax rate may increase to 12 percent, the price of the property may be cheaper if the benefit of additional tax credit outweighs the negative increase in the tax rate,” explains Harpreet Singh, partner, indirect taxes, KPMG in India.

“Buyers should not worry about the developers not passing on the benefit of the additional tax credit because GST also provides for an anti-profiteering provision which makes it mandatory for the dealer to pass on the benefit of GST to the end consumer. Therefore, it is a win-win for both buyers and developers,” says Singh.

Earlier, both homebuyers and developers received benefits under the abatement scheme (reduced tax rate under a special scheme). Under the service tax regime, for buying an under-construction flat, an abatement of 75 percent was allowed, subject to the flat being less than 2,000 sq ft and sold for less than Rs 1 crore, taking the effective tax rate from 15 percent to 4 percent. Similarly, if the cost of the flat was above Rs 1 crore and the size of the unit was more than 2,000 sq ft, the abatement was reduced to 70 percent and the effective tax rate to be borne by the buyer was 5 percent. States also charged VAT over and above service tax. This has now been done away with, say experts.

Conclusion

The benefits of Goods and Services Tax (GST) are quite big. Providing input tax credit will definitely bring the developer’s cost down, which is a positive outcome of GST on under-construction property. Also, the reduction in number of taxes will benefit the homebuyers. However, for this to happen, developers will have to streamline their processes to benefit from input tax credits. Only then will they be able to pass on the benefit of GST on under-construction property to buyers. Otherwise, despite anti-profiteering clauses in GST, homebuyers may still have to shell out a pretty penny for their own houses. Let’s wait and watch how this story develops.

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