Note on GST w.r.t. Proposed Changes in Real Estate

The GST council has proposed to reduce the GST on under-construction properties from 12% to 5% and on affordable housing from 8% to 3% without Input Tax Credit (ITC). Now, while most developers are welcoming this move and hailing it as a game changer- we need to take a second look on the real effect of this move.

Effect on Developer

Without the ITC of GST available to developers, the GST paid on inputs like steel, cement, tiles, hardware, marketing, brokerage etc. which was earlier being passed on to the end user will now simply become a part of their cost. Thus, these costs will now have to be borne by the developer and will eat away from his already wafer thin margins.

Also, the most significant impact will be on ongoing projects where the developers would have calculated their margins after taking into account the input credit of GST available to them. Now, their costs will suddenly increase due to non-availability of input tax credit. And since he would have sold a significant part of his inventory already, he would have no way of recovering these costs and would simply have to bear these huge losses.

Effect on Customer

As the cost for the developers will increase, they will in future have to pass on this cost to the customer by way of increase in prices.

This will deal a severe blow especially to affordable housing projects where the component of cost of construction is significant as to the total cost of these units. The combined effect of increase in price (due to non-availability of Input Tax Credit) along with the flat GST of 3% charged to the customer will be at least equal to, if not more than 8% (Discussed in detail with the help of an example in the end.

Effect on Economy

There could be following effects on the economy –

1. Housing prices, specially affordable housing prices will go up as the increased cost of the developer will ultimately be passed to the consumer in the long run.

2. Black money in real estate will increase, as developers will be inclined to buy all their inputs and pay all their vendors in cash to save GST. Currently, the developers do not mind paying GST on inputs as its credit is available.

3. The developer’s requirements for cash will increase, as they would want to buy inputs in cash and save GST. Also, the customer will be inclined to save his 3%/5% GST on purchase and would want to increase the component of cash while buying a house. This not only means a loss of revenue in the form of GST but also stamp duty for the respective state governments.

4. Constant changes in taxation and a lack of stable policy will deter future investment.

Conclusion

This change in GST regime may seem as a positive to developers and customer, its actual outcome as discussed above is negative, as it would increase the overall GST liability (Discussed in detail with the help of an example at the end) which would ultimately increase prices of houses. Even though it may seem like a move that may support the objective of ‘Housing for All by 2022’, a closer look suggests otherwise. Further, it would be a significant blow for the huge number of ongoing projects in the country, especially for affordable housing projects.

Overall, for the economy it’s a regressive step that defeats the very purpose of GST and leads to a cascading effect of taxes. On one hand, we are talking of including stamp duty in GST so that its credit is available and on the other hand the Govt. is removing input tax credit on GST. This would also mean an increased usage of black money in real estate which was currently on the decline.

Also, most importantly, this flip-flop on policies every now and then leads to huge problems for the businessman and the investors which plan a project keeping in mind certain tax and policy related issues, expecting them to continue throughout the life of the project. It kills the already struggling businessman and deters investments.

After RERA, Demonetization and GST, this sudden removal of Input Tax Credit would be a significant blow for the real estate segment. We suggest that if the govt. genuinely wants to help the real estate sector, it should continue with the ITC while keeping the GST around 6% for all projects- whether affordable or not. Alternatively, the new change can be made ‘optional’, and the choice be left to developers whether they want to pay 3%/5% without ITC or 8/12% with ITC.

Annexure A

Example                                                                                                                                                      

To understand these above changes, let us take the help of an example. Let us consider an affordable housing project located in a Tier – II city. Let us make the following assumptions-

1. Selling price at Rs. 2500 / sqft.

2. Cost of Construction (without GST) – Rs. 1100 sqft.

3. Land Cost – Rs. 500 sqft.

4. Marketing and Brokerage Costs – Rs. 150 / sqft

5. Other Costs (Office expenses, Financing Costs, legal costs, map approval expenses) – Rs. 250 / sq ft

6. Average GST cost on construction, marketing, brokerage etc. – 12%

Particulars Existing Scenario – GST Credit Available New Scenario – Input GST added to Cost
Basic Cost GST(12%) Total Cost Basic Cost GST Total Cost
Cost of Construction 1100 132 1100 1100 132 1232
Land Cost 500 500 500 500
Marketing and Brokerage 150 18 150 150 18 168
Other Costs 250 250 250 250
Total Cost 2000 2150
Total GST Input Credit 150
Developers Profit Rs. 2500-Rs. 2000= Rs. 500 Rs. 2500-2150 = Rs. 350

Now, let us look at the total GST collected by the Govt., from either the entire chain i.e. from the vendors of construction material, developer and customer.

Particulars Existing Scenario – GST Credit Available New Scenario – Input GST added to Cost
GST on Sale (%) 8% with credit 3% without credit
GST on Sale (Amount) Rs. 2500 x 8% = Rs. 200 Rs. 2500 x 3% = Rs. 75
GST Liability paid by Credit Rs. 150
GST Liability paid by Cash Rs. 50 Rs. 75
Total GST Outgo in the entire chain Rs. 200 Rs. 225 i.e. Rs. 150 which have been by way of input GST on materials and services now added to cost and Rs. 75 paid in Cash by way of Output GST Liability

Thus, as we can see the total liability has increased by Rs. 25. This effect of change in GST will vary on a project to project basis but is likely to be more than the existing GST liability specially for affordable housing projects where cost of construction as proportion to the total cost is significant.

(Author can be reached at dhruvdandia@gmail.com, M.No. +91-9462590810)

Author Bio

Qualification: CA in Practice
Company: M/s. Shubh Aangan Pushp
Location: Jaipur, Rajasthan, IN
Member Since: 21 Jun 2017 | Total Posts: 2

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4 Comments

  1. Dev Dutt Gupta says:

    ..MOST BUILDER 95% ARE NOT PASSING THE ITC TO BUYERS. LET GOVT REDUCE THE GST TO 5% AND NO INPUT TAX CREDIT PASSING BURDEN ON BUILDER .ALL BUYER AND HONEST BUILDERS WILL BE HAPPY..

  2. Nirmal says:

    In case one purchased a property before GST regim and on the basis of agreement to sale, he took a loan from bank and builder is agree to pass benefit by reducing base price, Bank is not accepting this and enforcing to do registration at old price. This problem came with STATE BANK OF INDIA. Can any one suggest remedeia action?

  3. CA NITHEESH P says:

    It’s true that the proposed amendment would call for builders buying more from unregistered dealers and would be against the very purpose of GST introduction.
    However, the same may have solution where the reverse charge mechanism from unregistered dealers is made effective, which is most likely to come effect from first April.

  4. Rama Krishna M says:

    The builders are not giving any taxable invoice to the customers and also some builders are charging 12% and some builders are charging 9% and the customers don’t know whether the builder paid the GST to the government or not and also on which base value the GST to be calculated. These are some answered queries from general public. If you can publish an article for these general queries, it will be good.

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