With the new GST law coming into force w.e.f. 1st July 2017, all businesses are busy analyzing the sectoral and business impact of this single biggest tax reform in the history of India. While many hail this reform as a game changer which would simplify indirect taxation and reduce tax by removing the cascading effect, some businessman are also concerned about increased compliances, increased headline tax rates and lack of clarity in the law. While the impact of GST on real estate in general is being debated widely, the impact on affordable housing in particular is not being discussed and analyzed much. However, as we will see, there is significant impact of GST on affordable housing especially on ongoing projects.

1. Current Scenario

Under the present service tax regime ‘construction service’ is subject to service tax @ 4.5% (Abatement of 70% on standard service tax rate of 15%). However, affordable housing has been exempt from the purview of service tax vide Notification No. 9/2016-ST.

Further, in Rajasthan, as per the VAT composition scheme, VAT is payable at Rs. 1300 for every Rs. 2 lakhs. Thus VAT is payable @ 0.65% on real estate projects. There is no exemption of VAT for affordable housing as such.

Stamp duty in Rajasthan is chargeable @ 6.5% (5.5% for women) for all real estate transactions. In case of affordable housing projects being developed by private developers the stamp duty chargeable is as follows-

  • EWS – 2.6% (60% exemption on standard rate)
  • LIG – 4.55% (30% exemption on standard rate)

For affordable housing projects in partnership nowith Govt. of Rajasthan the stamp duty payable is Rs. 50 and Rs. 100 per flat for EWS and LIG respectively. Stamp duty has not been subsumed under GST and its impact shall remain as it is.

2. New Scenario under GST

As per the new GST regime, construction services are taxable @ 12%. Entry no. 19 of the ‘Schedule of GST Rates for Services’ reads as under –

19. Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. [The value of land is included in the amount charged from the service recipient] 12% With Full Input tax credit (ITC) but no refund of overflow of ITC

Further, the exemption of service tax for affordable housing has not been continued in GST. The only mention of affordable housing as per the list of ‘Service Tax Exemptions to be continued in GST ’is at entry no. 66 which reads as below –

66. Services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to the Beneficiary-led individual house construction / enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY);

It is to be noted that this exemption is only for the ‘beneficiary-led individual house construction/enhancement’ vertical of the PMAY and not on all affordable housing projects. Thus, this exemption shall not be available to residential complexes being built by private developers.

A comparison between the current tax regime and the new tax regime under GST for normal real estate and affordable housing is as below –

Normal Real Estate Affordable Housing
Current Tax Regime Particulars Tax Rate Input Credit Tax Rate Input Credit
Service Tax 4.5% Not Available Exempt Not Applicable
VAT 0.65% Not Available 0.65% Not Available
Total Tax* 5.15%   0.65%
GST Regime GST 12% Available 12% Available
Total Tax* 12%   12%

*Stamp duty has not been considered in the above table as its impact will remain the same even after GST. The total indirect tax incidence on affordable housing including stamp duty will rise from 3.25-5.2% to 14.6 – 16.55%.

3. Implications of GST

Thus, the total indirect tax burden (excluding stamp duty) in normal real estate transactions has increased from 5.15% (without input credits) to 12% (with input credits). Since input credits shall now be available, the increase in tax rate shall have a limited effect on the client assuming the builder passes on the benefits of the input credits. In fact as per the Ministry of Finance, Govt. of India the liability of tax on buildings and flats under GST shall reduce and prices of flats shall come down (Press Release dated 15 June 2017).

However, the impact on affordable housing is significant as there is an increase of 11.35%. Affordable houses which were earlier almost completely tax exempt shall now be liable to tax @12%. Though the input credits shall now we available, it is unlikely to completely offset the increase of 11.35% in tax rates. Even the aforementioned press release by Ministry of Finance does not discuss the implications of GST on affordable housing.

Further, since RBI does not allow funding on indirect tax component of the flats, this additional amount of 11.35% will have to be paid by the buyer directly to the builder without any finance available.

For the builder, it is going to be difficult to collect this tax component from the buyer. This will especially be difficult for ongoing projects, the units of which have already been sold at the pre-determined price which was earlier exempt from tax. Let us take an example to understand this better.

Example : Let us consider a builder M/s. Affordable Builders Pvt.Ltd. which has launched an affordable housing project ‘XYZ homes’ in Jaipur, Rajasthan. He is selling a 1BHK 350 sqft unit @ Rs. 1715 which comes out to Rs. 6.00 lakhs. Down payment payable is 10% and the rest of it is to be financed by the bank. The builder had informed buyers that the rate is all inclusive and no taxes need to be paid since ‘affordable housing projects’ have been exempt from service tax. The project is completely sold out and 10% of the down payment has been received from all the buyers. The buyer profile includes people like farmers, tea vendors, factory workers, rickshaw drivers etc.

These affordable homes shall now be chargeable to GST @ 12%. Thus on a unit of Rs. 6.00 lakhs, the buyer is required to pay an additional tax of Rs. 72,000. That is more than the down payment of Rs. 60,000 paid by the buyer!

This raises the following concerns for the builders/buyers-

  • Considering the profile of the buyers, can we expect them to bear this increased incidence of tax?
  • Since no financing is available on the GST component of the flat, how will the buyer arrange for this burden due to the new levy of GST?
  • Can ‘M/s. Affordable Builders Pvt. Ltd.’ bear this tax of 12% when he is working at a margin of 15-20%?
  • Considering the profile of the buyers, can we expect the buyers to understand that there is a new levy of GST due to which he has to pay Rs. 72,000 extra. Will he not feel cheated?

4. Suggested Solutions

While on one hand govt. is giving interest subsidies to buyers under Prime Minister Jan Awas Yojana and income tax exemptions u/s 80 IBA, on the other hand it is negating these exemptions/benefits by leving GST. A 12% tax levy on affordable housing could seriously damage the nascent affordable housing industry which the govt. is so eager promote and could derail governments plans of ‘Housing for All 2022’. Thus, in order to keep the effect of GST neutral or minimal and achieve the govt. target of ‘Housing for All 2022’ the following suggestions are given –

  • Continuing the exemption for affordable housing – The exemptions for affordable housing available under service tax should be continued under GST. Further, in order to ensure that the increase in cost due to blocked input credit is minimum, works contract/labour contract given for an affordable housing project should also be exempt. Refund of input credits paid can also be given, similar to that given to exporters.
  • Reducing the rate of tax – The govt. should consider reducing the rate of tax or giving abatement on land value for affordable housing. Rates should be kept between 5-6% instead of the current 12%. Reduction in tax rates should also be done for works contract/labour contract given for an affordable housing project. Reducing the rate of tax might be a better option than completely exempting the project so that input credit is available.
  • Subsuming stamp duty under GST – Since stamp duty has not been subsumed under GST, the cascading effect of taxes has not completely been removed in real estate. The central and state governments should work towards subsuming stamp duty under GST as well to completely eliminate the cascading effect. Input credit should also be available for stamp duty paid on land purchased for executing affordable housing projects. However, considering the current scenario, absorption of stamp duty under GST looks farfetched as most states would be unwilling to cede this source of revenue.

Author Bio

Qualification: CA in Practice
Company: M/s. Shubh Aangan Pushp
Location: Jaipur, Rajasthan, IN
Member Since: 21 Jun 2017 | Total Posts: 1

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12 responses to “Impact of GST on Affordable Housing”

  1. Dsingh says:

    Clarification required on applicability of GST on Affordable housing projects under construction:
    I am in receipt of demand letter from Project under affordable housing located at Sector 99, Gurgaon, towards instalment due. As per the demand letter, tax has been levied. On query raised to company there is no clarity on basis of tax levied for affordable housing project under construction. It has been noticed that in last two instalments tax was not levied.

    Request clarification on gst applicable on such projects and also what were earlier guidelines.

  2. Ankith says:

    Hi Sir,

    I booked my flat before 30th June by paying 2.5 lacs (50k paid in builder’s name, 2 lacs paid in person’s name). Registration of the flat happened on 12th July but in all documents, the name of the individual is mentioned including the legal opinion from the bank where I took the home loan. My queries are;

    1. Am I liable to pay GST if all the documents is in the name of an individual (land owner) and not the builder (he doesn’t have any power of attorney)?

    2. I will be applying for PMAY CLSS subisidy since this is my first home in India. Do I still need to pay GST despite this?

    Looking forward to your response as I’m now being asked to pay 1.8 lacs GST against the previous 67.5k service tax.

    Thank you.

  3. Dhiraj singh says:

    I buy a flat in gurugram in affordable housing. There was no service tax applicable but now builder charging me 12 % it’s gone rs 276000 what I do.

  4. Prashant says:

    Is affordable homes comes under GST or not?

  5. AMit says:

    It is no more a affordable scheme. I have been allotted a flat and I need to pay 12 % of the Tax. I have no option and have to surrender the flat. Government of India, please wake up and review the situation. People like me with meager income are helpless by such a

  6. dayanand says:

    sir i have pay 5 % bookin amount finance by finanncer in feb2017 to builder for booking affordable flat now i am in july 2017 i have pay an amount of 20 % to builder and 5% to financer which finance me my booking amount but now builder charge an 12% gst to me on both amount 5% booking amount and 20% first instaalement.
    1. 5% is 116349 which finance by financer in feb 2017 2. gst payable is 69809 3. before gst i want to pay the builder is 5+20=581741 but after it is 5+20+12%=651552 is it legal

  7. Joshi says:

    Contractor getting works contract from Corporation for Affordable Housing is exempt under service tax.
    But GST exemption list contains no such clause.
    It is completely a harassment and loss making sector for contractors now. Who will bear the GST cost.

    Sir , please give your opinion.

    • Dhruv Dandia says:

      Yes you are right! Govt. has completely overlooked this. And sadly no one is raising this!

      • Alok says:

        Dear dhruv, nice article with full details and in-depth analysis. Please clarify about gst tax rate….It is 12% or 18%. Second input credits is available for raw material or on all the materials used for construction.

        • Dhruv Dandia says:

          GST rate is no 18% ith 1/3 abatement hich effectively brings it to 12%. Input credit is available.

  8. Adrash says:

    Sir please clarify,

    Whether GST is applicable on contract given by corporation to developer/contractor for Slum redevelopment and upgradation work under Pradhan mantri awas yojana.

    The same is exempted under Mega exemption list service tax 25/2012 . Clause no.29 .

    • Dhruv Dandia says:

      As of now, it is taxable. Entry no 29 which exempted sub contracts given for the main works contract where the main works contract is exempt has not been incuded in GST as of now. Hope that this is rectified soon

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