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.
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