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-
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|
*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-
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 –