Subsequent to introduction of GST, various Government Functionaries and Authorities has issued statements that GST has positive impact on Apartment Sales and their prices will be coming down. This has fuelled the aspiring Buyers to enquire and check the Apartment Prices whether they actually have come down or not. On the other hand, many Builders are confused lot and grappling to understand the effects of GST on the purchases of Raw Materials /Inputs & Input Services and trying to quantify the same. Therefore, Market has come to a standstill where both the Buyers & Sellers are in Wait and Watch Mode. In this article, we try to clear the air surrounding this particular Construction Industry by providing the Ways to measure the impact of GST and quantify the benefits from GST on the Apartment Sales and how much amount they can pass to the purchasers on the Apartment Sales.

Why the Builders are confused lot? Let us identify the reasons. Before GST, Builders were paying an effective total tax of 6% on the Sale Price of Apartment towards both Central Service Tax & State Sales Tax/VAT put together. Whereas the present rate of GST on the Sale Price of Apartment which is inclusive of both Central GST and State GST is 12% is seemingly on higher side.

Then, let us examine the effect of GST on Purchases Front. Usually Builders procure materials from Local Traders who were operating in the purview of State Sales Tax & VAT. In Pre-GST times, Builders were getting materials from Local Traders and were generally charged with State Sales Tax/VAT around 14.5%. They were procuring Services on which Service Tax was paid @ 15%. Now in the GST Regime, majority of the input materials like Steel, Ready Mix Concrete etc.,  are taxed at 18% and Cement, Tiles, Paints, Electrical Cables etc., are taxed at 28% and services are taxed at 18% and hence, there is seemingly increase in Tax be it on Sales or Purchases.

If this is so, How come the Government and its Officials claim that there will be reduction in the Apartment prices Post-GST !?

This claim is valid on two Counts. The earlier 6% Tax Outgo was entirely to be deposited in Cash and there was no availability of Input Tax Credit (ITC) of taxes paid on Inputs for offsetting the Tax liability. On the Other hand, very rarely, Builders were sourcing materials from manufacturers who were paying both Central Excise & sales tax/vat. In the Pre-GST times, the rate of Central Excise duty on the Inputs was generally @12.5% and many Builders are not aware of this incidence, though they were bearing it, indirectly. If we take the Central Excise duty charge of 12.5% & Sales tax/Vat charge of 14.5%, the total of these two taxes works out to 28%. In fact this will be much more, if we consider Entry tax, CST, & Check post expenses which were prevailing then. Since, the GST regime subsumed these multiple taxes into Single Tax and consolidated the Rate Structure of many of these items into 18%, 28% slabs. Therefore, One can observe that the Present GST Rate of Tax on material inputs is almost equal to the earlier Tax incidence and in many cases, it is lower. Coupled with this, the availability of ITC is the basis for the claim that there will be reduction in the Apartment Prices.

In this backdrop, let us try to quantify these benefits of GST. Generally the Apartments are sold on the basis of the Apartment area in Square Feet. If we consider the basic price of one Square Feet as Rs.3,000/-, the Tax Out go in Pre-GST  was Rs. 180/- (Rs.3,000*6% = Rs.180) and hence, the total price comes to Rs.3,180. [Out of the basic price of Rs.3,000, the land cost is taken as Rs.900, the Cost of Inputs & Services used in Construction is taken as Rs.1,400 and the balance of Rs.700 is towards Profit, Interest on the Capital employed & Administration Expenses etc.,].  The following is the sequence of Calculation Methodology;

Description % Tax Pre-GST % Tax Post-GST Formula used Explanation
In Rs. In Rs.
Total Price of One Sq.Ft 3,180 3,180 Post-GST Price of Rs.3,180 is taken for calculation purpose only
Basic Price 3,000 2,839 (Rs.3,180 x 100/112)

 

(112 = 100 + GST @12%)

This factor is used to arrive at basic price

Tax Outgo on Basic Price 6% 180 12% 341 (Rs.2839 x 12%)
Cost of Inputs & Services contained in One Sq.Ft 1,400 1,400
Amount of ITC available 261 (Rs.1400 – Rs.1138)

 

Rs.1138 is the basic value of Inputs & Services

(Rs.1400 x 100/123 = Rs.1138]

Average Tax rate was taken as 23 %. It is the average of GST rates of 18% & 28%

Net Tax Outgo in Cash 180 80 (Rs.341 – Rs.261) The net of Total Tax Outgo Rs.341 and  the available ITC Rs.261
Benefits from GST   100 (Rs.180 – Rs.80) Reduction in Net Tax Outgo in Cash
Post GST price of One Sq.Ft   3080 (Rs.3,180 – Rs.100)

From the above, One can conclude that the Net Benefit available on account of GST works out to Rs.100 (Rs.180 – Rs.80) on One Sq.ft of Apartment that was sold at the rate of Rs.3,180 before GST. This works out to 3% on the total price of One Sq.ft of Apartment. Therefore, One can expect a general 3% reduction in the Apartment Pricing.

At the same time, it may be kept in mind that the benefits on account of GST is dependent on many variables for eg., Quantum of materials/services procured from Unorganised Sector,  Use of Branded Materials in the Construction. The benefits from GST will be high in the case of Luxury Apartments on account of high proportion of Branded Goods used in them and thus the higher availability of ITC. Therefore, the Net Tax Outgo in Cash gets reduced further and considerable price drop may happen in the prices of Luxury Segment. Unfortunately, the benefits from GST will be lower in case of affordable Housing as the Builders were consuming locally produced materials sourced from the small manufacturers who were enjoying the benefits of Excise Exemption on turnover of Rs.1.5 Cr as they were forced to charge higher tax on account of reduction of exemption limit to Rs. 20 lakhs in GST regime. This segment also expected to get affected by liability of GST payable on account of RCM and increase in the requirement of Working Capital. Hope this article helps in providing the readers with a clear Framework for quantifying the benefits from GST implementation and assessing the impact of GST on Residential Apartments Construction Segment.

“Please note that the Content is merely for sharing knowledge. Author can be reached at vssprakashch@gmail.com or 9440551266.”

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12 responses to “How to Calculate benefits from GST while Purchasing Apartments”

  1. Satya says:

    I Have purchased a flat 3150/SFT which costs around 43lakhs and he is aking for 12% GST on total sale value. We are paying to builder not in any registration offices. I didn’t get any discount or any ITC. It is ready to oocupy property which we bought in august,

  2. padma says:

    I have seen a flat measuring about 656 Sq ft. Total price of the flat is 17,76250. Basic cost appart from this there is KEB Deposit and other charges. Now what i want to know is GST will be calculated on 17,76,250 and if so will it is 12% and when do i have to pay this tax, is it before registering or at the beginning.

  3. D Mahapatra says:

    I have booked a flat on 28 July 2017 in under construction building, started in Feb 2016. During negotiation developer discounted Rs 100.00 from base price. He told “there is no negotiation on this building, the discounted amount is from your input tax credit benefit only, which you will get later”. In this event, I want to know, (i) am I eligible for input tax credit benefit which will get other buyers later? (ii) Should amount differ or not with other buyers? (iii) How will I check the correctness of the ITC benefit from developer? (iv) In which stage of purchase process we will get back this benefit? (v) Should I get tax invoice separately from developer as I’m paying GST@12%? (vi) 1% TDS is applicable for the property costs above 50 Lac. So, I also want to know, on which part of flat (like consideration price, car parking, extra development fees etc) should I pay TDS amount? Please reply. Thank you

  4. Ranga Swamy B says:

    Sir Excellent article helpful information to builders and purchasers.

  5. Gurjit Singh Bhullar says:

    Regarding this Article:
    1. Rate of GST is not 12%, it is 18%. From the total amount 1/3rd is to be reduced, considered as value of land included therein. In cases of where land value is high the effective rate of tax would be higher than 12%.
    2. Rs.700 considered as profit of builder gets reduced by Rs.161 in the example taken. Net amount realised from customer getting reduced from 3000 to 2839.Even if reduction in price 100 due to GST as calculated in example is persumed to be correct (though it is not), profit is still reduced by 61, which comes to reduction in profit of almost 9%.
    3. Excise duties in earlier regime were on prices at manufacturing stage, not on the final purchase price for builder.

    All this considered with what the author has himself mentioned in last paragraph of the article and contentions of Mr, Vikas Saraf show that conclusions arrived at by author are not correct.

    • PrakashCh says:

      Thanks for the Comments. The Article is only meant for providing framework for calculating the benefits from GST. It was explicitly mentioned that it all depend on the variables.
      2. The Article considered the Cost of Inputs at Rs.1400 and Profit+Interest+Expenses at Rs.700. These values are taken as constant in Pre-GST & Post-GST. It has not taken the impact of GST on either input materials or services. So the question of Input prices affecting the profit doesn’t arise.
      3. If any Proof is available that Inputs prices have gone up in Post-GST, then only the variables will change. As per our knowledge, the prices of Input materials have come down at factory level and will trickle down to the market level shortly.
      4. The removal of Checkposts have cut down the Transport time and if will definitely lower the cost of Input Materials.
      5.I have already informed in the Comments section that the GST rate is 12% in case of inclusion of Land Value. If it is felt that the Land Value constitutes more than 33% of the Apartment Value, U are at liberty to bifurcate the Supply Portion and pay GST @ 18%.
      5. In view of the above facts, I finally conclude that it is Incorrect to say that the “conclusions drawn are incorrect”. Kindly review.
      6. If any one has different opinion, kindly put up an Article with the relevant facts. After all, these are all opinions. All the best.

  6. B K MOHANTY says:

    My builder has given me receipt against instalment deposit by deducting 12% GST ? What does it mean ? Will they ask for more towatrds GST ?

    • PrakashCh says:

      The total amount paid by you shall be taken as inclusive of GST. For eg. Rs.10,000 is paid by you, It shall be shown as receipt of Taxable Value Rs.8,931/- + GST Rs.1,071 = Total Rs.10,000. Assuming GST charged is @12%.

  7. C.Mallikarjun Reddy says:

    Excellent article. Even assuming that there is little variation in the assumptions, it works out to the same rate and customers should not be charged extra tax and tax can be adjusted by way of discount.

  8. VIKAS SARAF says:

    Mr. PRAKASH:

    Falt @ ₹3,000 per sq. Ft.!?!? Can you rework for a flat in a Metro – like MUMBAI or DELHI, where carpet price of a flat varies from Rs. 25,000 to 100,000 per sq. ft.!, whereas Construction Cost including all taxes is not more than ₹5,000 per sq. ft.!! You will be shocked to realise how WRONG the GoI is! There will be increase in price per sq. ft. as, when sold under construction, GST shall be applicable even on the land value, how so ever small in comparison to the Construction Cost.

    Moreover, in the earlier regime, only 5.5 – 6.5% was levied on Sale Price as SERVICE TAX + VAT; whereas same now hiked to 12%! This is against stated FITMENT policy of the GoI of having GST Rates closer to under old taxation regime.

    Moreover, when GoI talks about EXCISE DUTY & ENTRY TAX, it forgets that these levies were part of goods (only) used in Construction that in itself – as pointed above – is not more than 20% of the SALE PRICE on the maximum side in case of METROs. However, GST (@12%) is being levied even on 80% component that is LAND or FSI.

    SHOCKING! How GoI & CBEC not get this!!!

    • PrakashCh says:

      GST is to be paid on the Supply portion of the Transaction only. Land is out of purview of GST. One can reduce the Value of Land involved in the Total Transaction and pay GST on the Balance Transaction Value @ 18%. The GST rate of 12% is applicable where the Land Value is considered. One can rework the Purchase Agreement, accordingly. There is no restriction that one shall mandatorily include the Land Value for payment of GST. This is my opinion

      • VIKAS SARAF says:

        As already pointed out by Mr. BHULLAR, GST @ 12% shall be levied on TOTAL CONSIDERATION including LAND value!

        Also, can someone opine if GST shall be applicable on Transferrable Development Rights? In earlier regime, SERVICE TAX was not applicable! Also, TDR = Floating FSI, whereas, LAND = Fixed FSI; and if NO GST on LAND, can GST be applicable on TDR? Is TDR a Good or Service? What will be the HSN or SAC?

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